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Monday October 19, 2009 - 10:44:20 GMT
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Forex Blog - European Market Update: Barron's lectures the Fed on interest rates; Key corporate earnings continue to flow

Monday, October 19, 2009 5:39:15 AM
European Market Update: Barron's lectures the Fed on interest rates; Key corporate earnings continue to flow
- (FI) Finland Sept PPI M/M: -0.2% v 0.7% prior; Y/Y: -7.8% v -8.6% prior
- (HK) Hong Kong Unemployment Rate: 5.3% v 5.4%e

- European equity markets have rebounded from Friday's declines in morning trading with strong performance on all three of Europe's main bourses. Preparing for a busy week of European corporate earnings, weekend news and speculation continued to focus on M&A and IPO stories. UK insurer Aviva [AV.UK] released details regarding its proposed Delta Llyod IPO spin off, offering a price range of €15.5-19/share for a total valuation of €2.6-3.1B. UK transportation firm National Express [NEX.UK] updated its position vis-a -vis Stagecoach Group [SGC.UK] and Go-ahead Group [GOG.UK] with a reiterated interest in holding a capital raise. Speculation in the UK press had it that Spanish banking group BBVA [BBVA.SP] was considering buying RBS's [RBS.UK] England and Wales-based retail banking assets. Basic materials and Consumer Goods sectors all traded higher on the EuroStoxx50. Consumer Goods names Unilever [UNA.NV] and Nestle [NESN.VX] took lifts following upgrades and strong comments from analysts at UBS. Trading volumes have been light throughout the morning session with the CAC, DAX and FTSE all trading approx 30% below their moving averages.

- In equities: ABB [ABBN.SZ] disclosed a positive Q3 provision of $380M and guided its Q3 net profit at $1B v $910Me. The Alabama Supreme Court rules in favor of AstraZeneca [AZN.UK], GSK and NVS; strikes down prior $275M jury award against the companies. National [NEX.UK] Have not received proposal form First Group; See fund raising complete by 2010. Daimler [DAI.GE] will exceed its 2009 cost cutting goal of €4B by a double-digit percentage, according to German press sources. ThyssenKrupp [TKA.GE] plans to cut 2,000-2,500 administrative positions (about 1% of total workforce). Sulzer [SUN.SZ] reported nine-month orders at CHF2.28B v CHF3.33B y/y.

- In speakers: The BoJ's Hayakwa commented that Japanese companies were not calling for measures to weaken the yen, noting that a strong yen encourages companies to move abroad. Hayakawa aslo noted that the pace of output increases may slow down in October. The Bank of Japan (BOJ) released its quarterly regional report. The report stated that the economy remains severe in some regions but is improving in all regions. It noted the improvement in exports and output sectors but warned that CAPEX has been declining thanks to weak corporate profits. Consumption remains weak, although some impact of policy was seen. French Budget Min Woerth commented that France's 2010 GDP could exceed gov't official 0.75% target. The Polish Central Bank's Noga commented that Poland's 2010 GDP could exceed 2.0%, with GDP growth as much as 1.3% is still possible in 2009. Noga warned that public deficit levels remain a threat and the current economic data supports a neutral policy bias.

- In currencies: USD maintained a softer tone into the European open. Over the weekend, Barron's implored Fed Chairman Bernanke to raise the Fed Funds rate to 2% to prevent another asset price bubble. The dollar did see some initial gains in Asia following these comments. Howver, European traders concluded that Barron's doesn't set interest rate policy and won't influence the Fed's thinking about keeping rates low for a long, long time (like until 2011). The EcoFin meeting later today has dealers pondering whether the recent strength in EUR/USD would yield any change in the group's currency message. Dealers are expecting EcoFin to follow the G7 line on forex, with more concern over volatility rather then specific levels. Dealers noted that interest yield differentials have been trending in favor of the euro as the benchmark 2-year yield spread is around 46bps, the highest since early June. EUR/USD still unable to breech the 1.50 level, but its not too far off last's weeks 14-month high of 1.4967.

- The reserve curency issue continues to be a flash point. Former US Secretary of State Kissinger commented that China no longer wanted the dollar to control the global monetary system. Kissinger noted that any moves to alter the dollar's reserve status would be made over a long period. Sterling was weaker against the majors. Weekend press reports were not positive on the currency. According to Ernst and Young Item Club, the pound would continue to trade near parity against the Euro for up to four years. The London Times reported that BoE member Posen was ready to back an increase in the central bank's quantitative easing (QE) program next month. GBP/USD was holding below the 1.63 leve throughout the European morning. EUR/GBP was trading at 0.9170 area, up over 60 pips from its Asian opening levels. The yen was slightly firmer aided by comments from BoJ member Hayakwa.

- In fixed income: Short-dated treasuries have been subject to a modest bout of selling in the overnight session after Barron's ran a cover feature calling on the Fed to raise rates to avoid inflating another financial bubble. The 2-year note yield is higher by roughly 4bps in current trading but key psychological resistance of 1% is still in tact. Yields are higher across the term structure although the long end has held up better under the selling and the curve is flatter as a result. The 10-year Note is 2bps higher at 3.432% and the 30 year bond yield is steady at 4.25%. UK and German yield curves are also flatter, tracking he move in Treasuries. The 10-year Gilt has outperformed its peers just a touch after the BoE's Posen hinted at support for an expansion of QE next month. European peripheral spreads are narrower against Bunds with Italy (-3bps at Bunds +84) the best performer so far.

- In Energy: FT article noted that the Nigeria's government plnned to transfer 10% of its oil and gas joint venture to residents of the Niger Delta in a move to stabilize the Niger Delta region. There were reports that China's top two oil companies Sept gasoline stocks were -3.1% m/m and diesel stocks were +1.1% m/m to 7.1M tons.

- In the papers: London Times reported that BoE's member Posen was ready to back an increase in the central bank's quantitative easing (QE) program next month. The decision on whether to extend quantitative easing would depend on the outcome of the BoE's forecasting round. Posen suggested that the quantitative easing probably needed to go farther. The article added that a forecast from Ernst & Young Item Club predicts a "W" recovery, in which the economy struggles to grow in 2010.

*** NOTES ***
- Traders eye whether Q3 corporate earnings can deliver on heightened expectations.

***Looking Ahead:
- tba (RU) Russian Sept Unemployment Rate: 8.3%e v 7.8% prior
- tba (RU) Russian Sept Retail Sales M/M: 1.6%e v 1.8% prior, Y/Y: -9.0%e v -9.8% prior
- 8:00 (HU) Hungarian Central Bank Rate Decision: 50bps cut to 7.00% expected (current Base Rate is 7.50%)
- 8:00 (PD) Polish Sept Producer Prices M/M: 0.1%e v -0.2% prior, Y/Y: 2.2%e v 2.5% prior
- 8:30 (CA) Canadian Aug International Securities Transactions: C$3.00B3 v C$0.35B prior
- 13:00 (US) Oct NAHB Housing Market Index: 20e v 19 prior

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