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Tuesday May 25, 2010 - 10:01:49 GMT
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European Market Update: Risk aversion on two fronts prompts flight into safety

Tuesday, May 25, 2010 5:52:21 AM

 European Market Update: Risk aversion on two fronts prompts flight into safety


***Economic Data***
- (SZ) Swiss Apr UBS Consumption Indicator: 1.763 v 1.682 prior
- (FI) Finland Apr Unemployment Rate: 9.3% v 10.0%e
- (HU) Hungary Mar Retail Trade Y/Y: -4.0% v -3.7%e
- (SP) Spain Apr Producer Prices M/M: 1.0% v 0.8% prior; Y/Y: 3.7% v 2.4% prior
- (AS) Austria Mar Industrial Production M/M: -2.1% v -2.5% prior; Y/Y: -2.8% v 0.3% prior
- (SW) Sweden Apr Unemployment Rate: 9.8% v 9.0%e
- (NV) Netherlands May Producer Confidence: +0.4 v -2.0e
- (IT) Italy May Consumer Confidence: 105.4 v 107.1e; lowest reading since May 2009
- (IT) Italy Mar Retail Sales M/M: 0.5% v 0.1%e; Y/Y: 2.9% v -0.5%e
- (UK) Q1 Preliminary
GDP Q/Q: 0.3% v 0.3%e; Y/Y: -0.2% v -0.2%e
- (UK) Q1 Preliminary Private Consumption: 0.0% v -0.2%e; Gov't Spending: 0.5% v 0.6%e
- (UK) Mar Index of Services Q/Q: 0.2% v 0.2%e
- (EU) Euro Zone Mar New Orders M/M: 5.2% v 2.5%e; Y/Y: 19.8% v 15.0%e
- (SA) South Africa Q1 GDP Annualized: 4.6% v 4.3%e; GDP NSA Y/Y: 1.6% v 1.4%e
- Spain sold €1.06B in 3-month Bills, avg yield 0.645% v 0.549% prior; Bid-to-cover: 3.14X x v 3.3x prior. Sold €2.01B in 6-month Bills, avg yield 1.26% v 0.736% prior; Bid-to-cover: 1.91X v 2.12x prior

- Equities: Following the negative leads from the US and Asia, European equities opened the session broadly lower led by weakness in banks and basic materials companies. The declines have been driven by renewed concerns about EU debt levels following an earlier Spanish government bond auction and geopolitical worries on the Korean peninsula. The selling has been driven by Spanish banks follow an overnight report that the Bank of Spain was forced to merge 4 domestic savings banks. As of 5:36 EST, FTSE 100 is lower by 2.8%, DAX -2.9%, CAC 40 -3.3%, FTSE MIB -4.1%, IBEX 35 -4%

- In Individual Stocks: Boston Scientific [BSX]: Received CE Mark and FDA approval of NC Quantum Apex Balloon Catheter. Company plans to launch the product in European markets this week and in the
U.S. next month. || Marks & Spencer [MKS.UK]: Reported preliminary FY10 Net £526.3M and Revenue of £9.5B both numbers above estimates of £470M and £9.3B respectively. UK SSS grew 0.9% y/y. Company guided FY10/11 gross margins to be broadly in level with last year and operating costs to increase by 4-5% due to space growth. Group remained cautious on FY10/11 outlook || British Petroleum [BP.UK]: Provided update on Gulf of Mexico. Subsea efforts continued to focus on progressing options to stop flow of oil. Made preparations for interventions via the MC252 blow out preventer (BOP), this process may be conducted for about a week, starting in the next few days. Said its probe shows that so far the oil rig incident was due to the failure of a number of processes, systems and equipment. || De La Rue [DLAR.UK]: Reported FY Net £69.9M, Operating profit of £102.9M and Revenue of £561.1M; all figures above estimates of, respectively, of £71M, £109M and £539M. Increased dividend 3% to 28.2p. Expected 2010/2011 banknote volumes to remain at similar levels to 2009/2010 but with a greater than normal weighting towards the second half. Pension charges are expected to be £3M higher than the prior year. || Homeserve [HSV.UK]: Reported FY10 Net of £30.7M and Revenues £369M, above estimates of, respectively £68M and £370M. Increased yearly dividend by 24% to 44.0p. Expected UK customer growth of 3-4% and up to a 1 percentage point reduction in the retention rate. || BSS Group [BTSM.UK]: Reported preliminary FY10 Revenues of £1.35B comparing favorably to year-ago figure of £1.34B. Sees strong start to 2010/11 and notes that underlying business building momentumdividend increase of 10 % reflects confidence. Noted early cycle recovery in Domestic Division had commenced and that market share gains in Industrial Division underpinned second half improvement. Stated that specialist Division was through the worst and its recovery was underway.|| Avnet [AVT]: Announced a tender offer for Japoan's Unidux, Inc.[9897.JP]. Completion of the tender offer would require 66.7% of shares to be tendered, and Avnet has already received commitments to accept the offer from Unidux and its shareholders representing 37.6% of the issued shares. The acquisition is expected to be immediately accretive to earnings and is expected to achieve Avnets return on capital goals within three years. || C&C Group [GCC.IR]: Reported FY Revenues of €568M comparing favorably to year-ago amount of €514.4M. Noted a decline of 1.7% on like-for-like and constant currency basis. Company remained pessimistic on Ireland and UK perspectives. || Gazprom Neft [SIBN.RU]: Reports Q1 Net profit $727M and Revenues of $7.3B, well above year-ago figures of $335M and $4.2B

- Speakers: US Treasury Sec Geithner commented that the Yuan currency reform was China's choice and that China would Do what is in its best interests on the currency issue. The Treasury Sec stated that
Europe had the ability to manage its crisis and that its program of reform was "very strong" . The US would focus on G20 agenda to strengthen recovery***EU President Van Rompuy commented that the EU was not facing an economic Armageddon; places EU in a pivitol moment *** EU Commission Rehn stated that the economic recovery remained fragile and modest. He added that a failure to implement reforms could result in a 'lost decade'. Rehn noted that the question at this time was whether the EU economy could withstand the current turmoil ***German Dep Econ Min Pfaffenbach commented that the financial markets are convinced that the EU would solve the current crisis *** South Korea Finance Ministry reportedly to hold emergency meeting regarding turmoil in financial markets *** US Secretary of State Clinton commented that she was not concerned over China's US Treasury holdings ***US Treasury Secretary Geithner reiterated that the US remained committed to cutting budget deficit over time ***Kuwait Oil Min Al-Sabah commented that there was no need for emergency OPEC meeting with oil below $70/barrel; Need more compliance among OPEC members ***Spain Fin Min Salgado commented that the necessary exit strategy was the biggest challenge and needed to make sure it did not negatively affect recovery. He note that investors remained concerned over EU debt despite the recent rescue package ***Reportedly, EU to suggest haircuts for bank recapitalization. EU seeks a ban on funds used to recapitalize banks ***Fitch stated that contagion concerns continued to drive sovereign Credit Default Swap (CDS) liquidity ***

-Currencies/Fixed income:
North Korea situation prompted further risk aversion corresponding in a very poor Asian equity market performance. The sentiment did not fair better in the early part of the European morning with major bourses declining by 3%. The USD and JPY continued to benefit from the current scenario. The EUR/USD dipped below 1.22 while EUR/JPY cross hit fresh 9 year lows in the session. EUR/CHF cross tested just above the 1.42 area before consolidating the move. The drop in the Italian May consumer confidence added fuel to the fire as did the rise in Swedish unemployment. Market chatter of central bank moving reserves back into the dollar with the SNB and Russian central banks cited as culprits. The rumor mill remains active with dealer chatter circulating of hedge funds in trouble and Spanish banks using the discount window. The peripheral situation remained a concern. The Spanish Debt Agency (Tesoro) sold around €3.1B in its 3-mo and 6-mo T-Bills auction with higher yields and lower bid-to-cover from its prior auction. The spread on the 10-year Spanish/German bonds were back at pre-EU rescue levels. The flight into safety prompted lower bond yields in the major economies. The US 30-year yield below 4% while the German 10-year Bunds hit an all-time low below 2.58%

- Geo-Political: IMF concerned about Spain's economy, particularly its labour market and banking sector following news that the Bank of Spain took receivership of Spanish savings bank CajaSur over the weekend. Note four savings banks now to merge, Caja de Ahorros del Mediterrneo, CajaStur, Caja Extremadura and Caja Cantrabria, with total value of more than $169B in assets with 2,300 branches.*** Recent election polls indicate that acting Polish President Bronislaw Komorowski leads opposition's Kaczynski by 50% to 30% ahead of the 20th June 20 elections. This marks a slight improvement from 17th May polling figures with margin at 49% for Komorowski versus Kaczynski at 29%.***

- The Korean peninsula concerns adds to risk aversion; Far East stocks down between 2% to 3%
- Spanish Flu reverberates in Europe as Four Spanish banks merge, combined assets to total more than €135B
- Spread on the 10-year Spanish/German bonds move back above the at pre-EU rescue levels; German 10-year Bund at all-time lows below 2.58%
- Major European bourses down 3% to 4% ahead of the NY

***Looking Ahead***
- 7:00 (US) US Tsy Geithner press conference in Beijing
- 7:00 (EU) EU Commissioner Rehn and Spain Fin Min Salgado press conference
- 7:00 (BR) Brazil May FGV Consumer Confidence: No est v 115.3 prior
- 7:45 (US) Weekly ICSC Chain Store Sales
- 8:00 (PD) Poland Central Bank Interest Rate Decision: Unanimous analyst expectations is for the Base Rate to remain at 3.50%
- 8:55 (US) Weekly Redbook Retail Sales
- 9:00 (US) Mar S&P/CaseShiller Composite-20 Y/Y: 2.4%e v 0.6% prior; House Price Index: No est v 144.0 prior
- 9:00 (US) Q1 S&P CaseShiller Home Price Index: No est v 136.1 prior
- 9:00 (FR) France to sell €7.5B in Bills
- 9:30 (BR) Brazil Apr Current Account: -$4.9Be v -$506.7M prior; Foreign Investment: $2.8Be v $2.0B prior
- 10:00 (US) May Richmond Fed Manufacturing Index: 25e v 30 prior
- 10:00 (US) May Consumer Confidence: 58.9e v 57.9 prior
- 10:00 (US) Mar House Price Index M/M: No est v -0.2% prior; Q1 HPI: No est v -0.1% prior
- 10:00 (MX) Mexico Q1 Current Account: $83Me v -$690M prior; GDP Y/Y: 9.3%e v 3.5% prior
- 10:00 (MX) Mexico Apr Unemployment Rate: 4.7%e v 4.8% prior
- 10:00 (IT) Italy ISTAT annual report
- 11:15 (US) Fed's Bullard speech in UK
- 13:00 (US) US Treasury to sell $42B in 2-year notes


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