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Tuesday January 26, 2010 - 11:17:14 GMT
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European Market Update: UK unconvincingly moves out of recession, S&P turns up the pressure on Japan while China continues to lead equities lower

Tuesday, January 26, 2010 5:51:53 AM

 European Market Update: UK unconvincingly moves out of recession, S&P turns up the pressure on Japan while China continues to lead equities lower


- (SZ) Swiss Dec UBS Consumption Indicator: 1.195 v 1.276 prior
- (GE) German Import Price Index M/M: 0.5% v 0.0%e , Y/Y: -1.0% v -1.5%e
- (FR) France Dec Consumer Spending M/M: 2.1% v 0.6%e ; Y/Y: 5.9% v 3.8%e
- (GE) Germany Jan IFO Business Climate: 95.8 v 95.1e ; Current Assessment: 91.2 v 91.3e, Expectations Survey: 91.2 v 99.1e
- (EU) Euro-Zone Nov Current Account: €0.1B v -€4.6B prior ; Current Account NSA: €0.1B v -€3.9B prior
- (IT) Italy Nov Retail sales M/M: 0.0% v 0.1%e; Y/Y: -1.3% v 0.6%e
- (UK) Q4 Advanced GDP: 0.1% v 0.4%e, Y/Y: -3.2% v -3.0%e

-In equities: European equity markets look set to print 5 consecutive days of declines. Today's downside open can directly trace its explanation to the same themes that have driven markets lower since last week. Continued, indirect commentary, regarding reductions in Chinese lending levels, have applied pressure to global equity markets. European banks have taken the brunt of this rotation with the sector trading broadly lower. In related trade, minerals and miners, names that gained so much in 2009 due to their relation to
China continued to feel the opposite side of the relationship. Earnings continue with German conglomerate/services group Siemens [SIE.GE] smashing net expectations and providing supportive margin figures. Earnings from Novartis [NOVN.SZ] sent those shares higher while mixed figures from KPN [KPN.NV] led to flat/downside trading. Equity markets opened at their trading session lows and showed some signs of retracements into 4:30EST as traders anticipated the long awaited move of the UK out of recession. UK GDP figures at 4:30 did put Q4 GDP in positive territory, but only marginally, and below expectations once again. Equities, on good volume have continued to rotate lower form that time.

-In individual equities: Siemens [SIE.GE]: Reports Q1 Net €1.48B v €903Me, Rev €17.4B v €17.8Be, reiterates FY10. || KPN [KPN.NV]: Reports Q4 EBITDA €1.3B v €1.3Be, Rev €3.37B v €3.4Be, Announces €1B share buyback (5% of market cap). || Novartis [NOVN.SZ]: Reports Q4 Net $2.3B v 2.4Be; Net Sales $12.9B v $12.2Be; Appoints Joe Jimenez as new CEO, effective Feb 1. ||

-Fixed Income/FX: Heading into the
London open an all too familiar picture of risk aversion had developed thanks a number of themes emanating from the Asian session. Asian stocks slumped after reports surfaced of another Chinese government clampdown on bank reserve requirements, driving UST's and the greenback higher, and commodities lower. The glaring exception was a bout of JPY weakness stemming from S&P's downward revision to Japan's AA sovereign rating. USD/JPY gained some 90 pips following the announcement to 90.45, but promises of fiscal discipline from both Finance Minister Kan and his deputy Noda saw a reversal in fortunes for the Yen, sending the pair back below the 90 handle and indeed below 89.50 at the time of writing. EUR/USD remains offered despite enjoying a modest boost from a better than expected reading in the IFO Bus Climate Index, with the pair trading below the 1.4100 mark for most of the European morning. UK Q4 GDP was always shaping up as the highlight of the European session and while the UK managed to finally, and only just, exit recession the +0.1% reading undershot expectations and hardly inspires confidence in the economy. GBP/USD slumped over 100pips following the data with dealers eyeing 1.6080 as next support in cable.

- Gilts have subsequently outperformed Bunds and Treasuries although all three markets are performing strongly as other asset classes slump - with benchmark 10y yields sitting at their lowest levels since mid Dec and yield curves flatter thanks to long end outperformance. Following yesterday's resoundingly successful 5y issuance, the Greek debt agency confirmed plans to sell up to €5B in a syndicated 10y in Feb, sending the country's 10y yields back through 300pbs over Bunds.

Kazakhstan has once again proposed altering its tax legislation in relation to foreign operations of oil and natural gas in the country. If the move is pursued, existing concession contracts could be re-written in a less than favorable manner to international oil. Kazakh targets include Kashagan, Karachagank and Tengiz fields. Chinese news sources have speculated that sulfur dioxide emissions targets are expected to be cut by 400K metric tons in 2010. This action to follow statistics that are expected to put 2009 cuts ahead of schedule. It is expected that Gazprom took at loss of nearly $1B following 2009's transit dispute with Ukraine. During that period, the company was unable to deliver 4.5B CM of contractually obligated gas to Western European buyers. ENI is speculated to be in talks with the Italian government to sell its TAG natural gas pipeline system. The sale comes under pressure from the EU to break the firms grip on the Italian gas market and could allow ENI to avoid a €1B penalty. The TAG pipeline brings Russian gas to Italian end markets via Austria.

-Geo/political: US Pres (D) Obama has proposed at 3-year domestic spending freeze that is projected to save approx $250B through 2020. Details of the plan, which exclude defense and homeland security spending, are expected to be outlined on Wednesday's State of the Union address.
Sri Lanka commenced elections for President in which the electorate will vote for the countries first 'peacetime' Pres in nearly 30 years. Last year's bitter, violent and still internationally questioned methodology that put down a long lasting Tamil rebellion has positioned the island state to reap a potential 'peace dividend.' Voting is taking place under intense security with the two main contenders, Rajapaksa and Ronseka having both been architects of last year's military operations. Splitting of ethnic vote is expected to provide an opportunity for minority parties to poll well. Coordinated bombing attacks in Baghdad yesterday have continued into today with further assaults. Targets have continued to be focused on hotels near the heavily fortified former 'green zone ' that are popular with foreign media and contract workers. Attacks are expected to accelerate ahead of scheduled parliamentary elections in March. Despite yesterday's violence, ExxonMobil finally committed to JV operations with Shell in regards to the Qurna oil field.

Looking ahead:

- (PD) Poland Central Bank Interest rate decision expected: Consensus expectations for the Base rate to remain at 3.50%
- (SA) South Africa Central Bank (SARB) Interest rate decision: Consensus expectations for rates to remain unchanged at 7.00%
- 9:00 (US) Nov S&P CaseShiller Home Price: 146.8e v 146.58 prior; Composite-20 Y/Y: -5.0%e v -7.28% prior
- 10:00 (US) Jan Consumer Confidence: 53.5e v 52.9 prior
- 10:00 (US) Jan Richmond Fed Manufacturing Index: 0e v -4



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