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European Market Update: Early risk appetite fades following unexpectedly decline in German IFO data; BOE sees merits of increasing scale of asset purchases program further and continues to talk down..

Tuesday, February 23, 2010 5:54:01 AM

 European Market Update: Early risk appetite fades following unexpectedly decline in German IFO data; BOE sees merits of increasing scale of asset purchases program further and continues to talk down the GBP currency


- (SZ) Swiss Jan UBS Consumption Index: 1.360 v 1.195 prior
- (FI) Finland Jan Unemployment Rate: 9.5% v 7.9% prior
- (FR) France Jan Consumer Price Index M/M: -0.2% v -0.3%e; Y/Y: 1.1% v 1.1%e
- (FR) France Jan CPI EU Harmonized M/M: -0.2% v -0.2%e; Y/Y: 1.2% v 1.3%e; CPI ex Tobacco Index: 118.32 v 118.60 prior
- (FR) France Jan Consumer Spending M/M: -2.7% v -1.1%e; Y/Y: 1.5% v 3.6e
- (TT) Taiwan Q4 Current Account: $11.8B v $9.6Be
- (NE) Netherlands Feb Producer Confidence: -6.9 v -7.5e
- (IT) Italy Feb Consumer Confidence: 107.7 v 111.7e
- (HK) Hong Kong Jan CPI Composite Y/Y: 1.0% v 1.0%e
- (GE) Germany Feb IFO Business Climate: 95.2 v 96.1e; Current Assessment: 89.8 v 91.9e; Expectations Survey: 100.9 v 100.5e
- (IT) Italy Jan Final CPI (NIC incl Tobacco) M/M: 0.1% v 0.1%e; Y/Y: 1.3% v 1.3%e
- (IT) Italy Jan Final CPI EU Harmonized M/M: -1.5% v -1.4%e; Y/Y: 1.3% v 1.4%e
- (PD) Poland Jan Unemployment Rate: 12.7% v 12.8%e
- (PD) Poland Jan Retail Sales M/M: -24.4% v -23.8%e; Y/Y: 2.5% v 5.5%e
- (SA) South Africa Q4 GDP Q/Q Annualized: 3.2% v 2.6%e; GDP SA Y/Y: -1.4% v -1.7%e
- (UK) Jan BBA Loans for House Purchase: 35.1K v 43.0Ke

- Equities: Mixed trading in Asia and the US failed to dampen an initial risk attuned trade in Europe. Earnings provided some of the support with two premier European brewers, Heineken [HEIA.NV] and Carlsberg [CARLB.DE] shaking off concerns over 'down trading' and Russian taxes in their reports. The premarket session also saw a wave of reports from German solar sector names. Reports from Q-Cells [QCE.GE] and Solon [SOO1.GE] showed the expected effects of massive restructuring and cost deferrals. Despite taking large impairments, the sector remained strong on its demand picture into 2010 and yesterday's commentary on reduced cuts to German Feed-in-tariffs boosted shares. Not all earnings releases were positive, with Merck [MRK.GE] moving sharply lower following its earnings that included a dividend cut and guidance that the market was not looking for. Upward movers on a non-earnings nature included Wolsely [WOS.UK] that released a surprise announcement that it expects to beat current analysts FY pretax estimates and AstraZeneca [AZN.UK] that concluded a tax matter with the UK gov. European trading began to surrender its positive tone at 4:00EST with the release of German IFO business climate for Feb. This data sparked a downward rotation. Commentary from the IFO and then various members of the BOE to Parliament increased this selling pressure. Into 5:30. The DAX had taken out the unchanged mark while the FTSE and CAC moved well off their best levels. Trading volumes are down on the session in relation to their moving averages.

- In individual equities: Merck [MRK.GE]: Reports Q4 Net €56.7M v €227Me, Rev €2.03B v €2Be. || AstraZeneca [AZN.UK]: UK tax settlement on transfer pricing; Raises FY10 EPS target to $5.90-6.30 from $5.75-6.30 ($1.61e) on the back of lower tax expectations. || Q Cells [QCE.GE]: Reports FY09 EBIT adj loss €77M v loss €233Me (ex impairments), Rev €801M v €897Me. || Solon [SOO1.GE]: Reports FY09 Net loss €276M v loss €128Me, Rev €354M v €385Me. || Heineken [HEIA.NV]: Reports FY09 Net €1.02B v €1Be, Rev €14.7B v €14.7Be. || Carlsberg [CARLB.DE]: Reports Q4 Net DKK383M v DKK629Me. op profit DKK1.64B v DKK1.7Be, Rev DKK13.6B v DKK14.0Be. ||

- Speakers: ECB's Ordonez commented that doubts over consistency of recovery remain due to unemployment and high Spain deficit. He stated that Spain needed an ambitious plan to lower the deficit and this required Labor market reform. He added that Spain risked a tarnish reputation if deficit was not reduced. On the banking sector he commented that most Spanish banks were solid but bad loans would rise if labor market reforms were not implemented He reiterates view that worst of the crisis for Spain has passed and that the country's spending reductions were in the right direction ***RBA Dep Gov Battellino commented that the mining boom would add to inflation pressures in Australian economy. He noted that the floating exchange rate had been an important factor helping to dissipate inflation. *** BoE's King testified in the quarterly inflation report that it might be necessary to expand Quantitative easing (QE) at future meetings adding that it all depends on how things "pan out". He commented that he would be very surprised if ratings agencies took action against UK sovereign ratings. He still saw economic risks to the downside as the recovery in global and UK markets remained fragile. The recovery in the UK's export markets seemed to have stalled and that high saving countries [China, Japan] must seek to expand domestic demand*** BoE's Miles commented that the February MPC decision to maintain quantitative easting at £200B was "finely balanced" (minutes show the vote was unanimous) *** BoE's Bean stated that the stimulus were still working through the economy and that a weaker GBP would boost exports (and hurt imports). He expected the Euro-Zone to have sluggish recovery and cautioned that Chinese growth momentum could subside *** BoE's Dale stated that there were merits to increasing scale of asset purchases program further, but doing so would entail significant risks. Stimulus measures and GBP currency are both underpinning gradual recovery. He noted that inflation would be above target in near term as GBP currency, oil prices and VAT rise drove inflation. *** South Africa Central Bank's Marcus commented that the SARB was focused on sustainable economic growth and that recovery was consistent with global trends. Short term indicators suggested the onset of economic recovery but cautioned that major global risks still lurked as demonstrated by the European peripherals (Spain, Greece) ***Harvard University Professor (and former chief IMF economist) Rogoff stated that was very likely to see 'a bunch' of sovereign defaults over the next few years. He noted that the ballooning public debt was likely to force several countries to default and the US to slash spending. Financial markets would eventually drive bond yields higher, and European countries such as Greece and Portugal would have a lot of troubles. He did concede that it was hard to call the timing, but it "would happen" *** Germany IFO's Sinn commented that the drop in index was due the retail sector. He noted that the Euro should "more or less" maintain current levels but further depreciation could not be ruled out *** Germany IFO's Nerb stated that weather affected the German IFO readings. He also noted that one could not rule out further currency declines as the Euro remained overvalued ***

- Currencies: The USD reversed its earlier weak tone against the European pairs aided by an unexpectedly declined in the German IFO and testimony from BOE members of the potential benefits of a weaker GBP. The risk appetite was initially on the rise during the early part of the session after press reports of a Dubai World package from the Dubai Government. EUR/USD tested above the 1.3680 level to weed out weak dollar longs and moved back to 1.3610 in the aftermath of the IFO data. ***The GBP fell around 200 pips from its early morning highs of 1.575 as dealers took notice of pretty dovish comments from the BOE testimony. Each of the BOE members seemed to mention the benefits of a weak GBP currency numerous times and dealers took the point. GBP/USD at 1.5420 as the NY morning approached. ***RBA comments help the AUD/USD test 0.9070 in early going but the AUD ceded most gains as metals and energy were affected by the USD's reversal. *** A SNB spokesperson would not comment (again) on the late 50 pips upward move in Asian EUR/CHF pair to 1.4685.

- Fixed Income: Gilts have performed strongly during the session after a slew of BoE members emphasized that there is every chance QE could be revived some time in the future. Both Governor King and MPC member Spencer Dale noted that a decline in conditions could prompt further asset purchases, while Miles noted that the February decision to let QE expire was finely balanced(somewhat inconsistent with the unanimous vote outlined in the minutes last week), On top of this, another factor underpinning strength in the Gilt market is the order books on the DMO's syndicated 50 year issue are said to be strong. Futures are currently up over 30 ticks with cash yields lower across the curve. The Greek debt agency conceded that it was still watching the market closely and was not yet soliciting interest in its highly anticipated second bond sale of the year. Meanwhile the Netherlands sold €825M in off the run DSLs

- Energy: The Nigerian Oil Ministry, spurned by new interim Pres J Goodluck has introduced new energy legislation (includes 100 new policies) that specifically targets the offshore sector. Nigeria is seeking to accelerate efforts to cut down on the use of natural gas flaring in both deepwater and shelf drilling. Numerous integrated oils, including Chevron and Shell have responded to the proposal, stating that the development of offshore assets will be broadly hindered, or abandoned on such actions.

- Geopolitical: A diplomatic row between the UK and Argentina continues to develop as UK oil exploration firm Desire Petroleum has begun offshore drilling operations. The Ocean Guardian began preliminary operations off the disputed South Atlantic Falkland (Maldives) Islands. Argentina had sought to block access to the islands by the rig without express transit authority. This action was subsequently ignored. Oil firms, led by Royal Dutch led unsuccessful attempts to search for oil in the region in the mid-1990's that were deemed economically unviable due to then trading price of oil. Were Desire to make a large find, the political situation is expected to get stickier. Both the UK and Argentina fought a short, but violent conflict over the region in 1982 in which an Argentinean invasion force was defeated by a UK naval task force. *** Dubai's government has indicated that it will not seek to take a senior lending position in on-going restructuring talks between DW and its creditors. Such an action was widely expected by investors who thought the state would move in that direction in an attempt to recover funds injected in DW. The action would, however, had provided some level of clarity to a still confused party/counterparty debt issue. The gov of Dubai has confirmed that it has released $5B to DW to make its next coupon payment, those funds coming from an initial lending tranche from Abu Dhabi in Dec, 2009. *** Pilots at Lufthansa have ended a strike action with the airline expecting a return to full normal flight operations by this Friday. Strikes have been suspended through March 8 with the union and management returning to talks. Strikes by French oil refinery workers along with planned strikes by French air traffic control unions in addition to a 'general' labor strike in Greece are still on. Greek unions and communist party activists briefly occupied the Athens Exchange, seeking to cancel trading operations for the session prior to their removal.

- Early risk appetite due to possible Dubai World e debt proposal peters out
- German IFO unexpectedly decline; weather cited as a factor
- BOE members seem to like a weaker GBP
- Fed Chairman Bernanke's semi-annual Monetary Policy Report to the House Financial Services Committee (Wednesday) and the Senate Banking Committee (Thursday), which will be a major focus now that the Fed has commenced the process of unwinding extraordinary easing measures
- EU and IMF officials back to Athens to talk austerity measures.

***Looking Ahead:
- 7:00 (BR) Brazil Dec Retail Sales M/M: 0.2e v 1.1% prior; Y/Y: 10.4%e v 8.7% prior
- 7:00 (BR) Brazil Feb IBGE CPI IPCA-15 M/M: 0.9%e v 0.5% prior
- 7:10 (UK) BOE Tucker
- 7:45 (US) ICSC/GS weekly chain store sales w/e Feb 20th: -
- 8:30 (BR) Jan Current Account: -$4.9Be v -5.9B prior; Foreign Investment: $800Me v $5.1B prior
- 8:55 (US) Redbook Retail Sales for the week ending Feb 20th
- 9:00 (BE) Belgium Feb Business Confidence: -6.5e v -7.0 prior
- 9:00 (US) Dec S&P/CaseShiller Composite-20 Y/Y: -3.1%e v -5.3% prior; Home Price Index: 146.3e v 146.3 prior
- 9:00 (US) Q4 S&P/CaseShiller Composite-20 Y/Y: -1.2%e v -8.9% prior; Home Price Index: No est v 137.2 prior
- 10:00 (US) Feb Consumer Confidence: 545.0e v 55.9 prior
- 10:00 (US) Feb Richmond Fed Manufacturing Index: 2e v -2 prior
- 10:00 (MX) Mexico Jan Trade Balance: -$541.5Me v -$245.8M prior
- 10:00 (MX) Mexico Dec Retail Sales: 1.5%e v -1.5% prior
- 12:30 (UA) Ukraine to sell bonds
- 12:30 (MX) Mexico to sell MXN2.55B in 5-year FRN
- 13:00 (US) Treasury to sell $44B in 2-year notes
- 14:00 (AR) Argentina Jan Trade Balance: No est v $1.3B prior
- 15:00 (BR) Brazil Jan Tax Collections (BRL): 68.7B v 73.9B prior

- 16:00 (KS) South Korea Feb Consumer Confidence: No est v 113.0 prior



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