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Wednesday May 19, 2010 - 10:18:33 GMT
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European Market Update: Germany's unilateral short selling ban pressures equities, Euro currency

Wednesday, May 19, 2010 6:14:42 AM

 European Market Update: Germany's unilateral short selling ban pressures equities, Euro currency


*** Economic Data***
- (SP) Spain Q1 Final GDP Q/Q: 0.1% v 0.1%e; Y/Y: -1.3% v -1.3%e
- (RU) Russia Industrial Production M/M: 3.4% v -5.7%e; Y/Y: 10.4% v 7.3%e
- (UK) BoE Minutes: Voted Unanimous To Maintain Interest Rates Steady At 0.50% And Maintain Asset Purchase Facility At £200B
- (SA) South Africa Retail Sales Y/Y: 1.0% v 0.3%e


- Equities: Germany's unilateral decision to impose a ban on the naked short selling of domestic banks and government bonds has driven the weakness in today's equity session. After opening lower by more than 1% across the board, most equity markets continue to trade in negative territory. The equity losses have been led by the banking sector, and the steepest declines have been seen in
Italy, Spain and France. As of 5:37 EST, FTSE 100 -2.1%, CAC-40 -2.8%, DAX -2.5%, IBEX-35 -3.5% and FTSE MIB -3.5%.

- In individual stocks: Agfa Gevaert NV [AGFB.BE]: Reported Q1 Net income and Rev of €18M and 664M respectively both above estimates of €12M and €672M || Scottish Southern Energy [SSE.UK]: Reported FY10 Rev £21.6B above analysts estimates of £21B. Company aimed to increase dividend by at least 2%+ of RPI inflation rate || Experian [EXPN.UK]: Reported preliminary FY10 Net income $600M which compared favorably to year-ago figures of $486M y/y. Revenues came in flat compared to year-ago figures at $3.9B. Company also announced $300M share buyback. Company plans to raise dividend in future.|| Icap [IAP.UK]: Reported FY10 Net £116M below analysts' estimates of £171M. Revenues were in line with estimates at £1.6B || Air
France [AF.FR]: Company is expected to report today after the close but according to an article from La Tribune, group may report an operating loss of €1.3B for fiscal year. Already this weekend, Le Figaro reported that Air France may report an operating loss of €499M on its cargo unit for FY || Commerzbank [CBK.GE]: CEO spoke during the AGM and reiterated the previous outlook in which the group would only remain profitable if 2009 is basis for a successful start in 2010 if economy and financial markets continue to be supportive. CEO warned against overconfidence despite statements that 2009 end provided a positive basis for 2010.

- Speakers: German Chancellor Merkel stated that Euro is in danger and that challenges mus be met in order to deal with this danger. She reiterated that if euro fails,
Europe will fail and emphasized the importance of ECB's independence and the price stability as its main priority. On short - selling ban, she said the ban would remain effective until there is a European deal and reiterated the need for a tax on financial markets in the form of financial transaction tax or levy*** Former Fed Member Mishkin said that the Europe should have let Greece fail. Noted the Europe fiscal situation is at a critical juncture and that it is worse than the US. He said that fiscal irresponsibility could lead to inflation and that ECB purchase of sovereign debt is very dangerous *** ECB's Stark noted that Europe is in deep crisis and that the Bond purchases are only risky if they are used long term. Reiterated ECB's priority of price stability. *** Germany's Finance Minister Schaeuble said that Markets had not been convinced and deficits still needed to be reduced. Schaeuble expected Greece to repay its debts. He ruled out a VAT hike during this legislature. *** BoE's Posen commented on German on short-selling ban and deemed it understandable but it would not stop price declines. *** Former BoJ Member Mizuno said that German short-selling ban may increase euro selling but did not expect Japan to act on yen rise against euro. *** Hungary Central Bank said that a strict fiscal policy was needed for the euro currency. The Central bank did not set euro target date in Convergence report

- Currencies/Fixed income:
Germany's unexpected decision to ban short-selling spooked the markets and set a tone of risk-aversion for the rest of the session. Bunds rallied in early trading after the decision but fell after the German weak auction. However, they remain in positive territory. Gilts futures were also higher on risk aversion and continue to be at their session highs after the BoE minutes showed the unanimous decision to maintain the base rate and asset purchase facility. EUR/USD fell to a session low of 1.2145 from 1.2228 highs after Merkel stated that the euro currency was in danger and that Europe must meet challenges ahead in order to deal with the danger it faces. She further reiterated that the failure of the euro currency meant the failure of Europe, which highlights the severity of the sovereign situation. Price action remained choppy as it increased at 1.2170 and boosted by sovereign names to 1.2200 and at the time of writing fell back to 1.2176. Pound is also suffering pressures from risk aversion and cable traded at 1.4265 after falling from European highs of 1.4371. EUR-CHF briefly traded under 1.4000 , which coincided with the release of Swiss FX reserve data from April. The overall currency reserves rose to CHF 153.6 bln from CHF 124.9 bln in March, reflecting the heavy intervention carried out by the SNB. Swissy traders however remain doubtful that the bank can absorb the weight of the buying pressure, as the cross is struggling to sustain the recovery.

- Geopolitical: Germany's financial regulatory authority BaFin announced ban on naked short-selling of euro region government debt securities, major financial companies, and some credit default swaps. The ban is to take effect from 03.00ET Tuesday to 31st of March of next year. Other European regulatory bodies have acknowledged the measures taken by BaFin with some considering its implementation. ***Following the broad support for tighter regulation on hedge funds, the details of the draft version of the Alternative Investment Fund Managers directive agreed upon by the EU Finance Ministers will be finalised prior to submission to the European Parliament in July. ***UK House of Commons reconvened since elections. Deputy Prime Minister Clegg continued to reiterate the view that the incumbent coalition will dramatically change Britain for the better.*** After Thailand's Senior Protest leader stated they would end protests violence escalated in the country which lead to the burning of Thai Stock Exchange. Thai Defense Minister would implement curfew in Bangkok

** Additional Notes
- Greece completed its €8.5B bond repayment which matured today, May 19

**** Looking ahead ***
-7:00 (US) MBA Mortgage Applications w/e May 14th: No est v 3.9% prior
-7:00 (BZ) Brazil May FGV Preview Inflation IGP-M: 1.06%e v 0.50% prior
-8:00 (HU) Hungary Central Bank Minutes:
-8:00 (PD) Poland Apr Employment M/M: 0.1%e v 0.0% prior; Y/Y: -0.2%e v -0.6% prior
-8:00 (PD) Poland Apr Avg Gross Wages M/M: -2.5%e v 6.2% prior; Y/Y: 3.7%e v 4.8% prior
-8:30 (US) Apr Consumer Price Index M/M: 0.1%e v 0.1% prior; CPI Ex Food&Energy M/M: 0.1%e v 0.0% prior; CPI NSA: 218.1 est v 217.631 prior
-8:30 (CA) Canada Mar Wholesale Sales M/M: 0.6%e v -1.2% prior
-9:00 (US) Fed's Dudley gives opening remarks at conference in New York
-10:00 (US) Q1 Mortgage Delinquencies: No est v 9.47% prior; MBA Mortgage Foreclosures; No est v 4.58% prior
-10:30 (SP) Spain's Fin Min Salgado addresses EU Parliament Panel
-10:30 (US) Weekly DOE energy inventory: Crude Me; Gasoline: Ke; Distillate: Me; Utilization: %e
-14:00 (US) FOMC Policy Minutes



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