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Wednesday August 25, 2010 - 10:38:00 GMT
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European Market Update: German IFO beats expectations but sovereign woes ebb enthusiasm (Trade the News)

Wednesday, August 25, 2010 5:58:48 AM

 European Market Update: German IFO beats expectations but sovereign woes ebb enthusiasm


***Economic Data***
- (HU) Hungary Jun Retail Trade Y/Y: -4.6% v -5.6%e
- (SP) Spain July Producer Prices M/M: % v 0.1% prior; Y/Y: % v 3.2% prior
- (SW) Sweden Aug Consumer Confidence: 25.2 v 23.0e; Manufacturing Confidence: 6 v 6e; Economic Tendency Survey: 109.9 v 112.0e
- (TH) Thailand Central Bank raised the Benchmark Interest by 25bps to 1.75%; As expected
- (GE) Germany Aug IFO Business Climate: 106.7 v 105.7e (highest reading since Jun 2007); Current Assessment: 108.2 v 107.5e; Expectations Survey: 105.2 v 104.3e
- (NO) Norway Jun AKU Unemployment Rate: 3.5% v 3.6%e
- (SA) South Africa July CPI (all items) M/M: 0.6% v 0.9%e; Y/Y: 3.7% v 4.0%e
- (IR) Ireland July PPI M/M: -0.6 v -0.4% prior; Y/Y: 0.9% v 1.2% prior

Fixed Income:
- (EU) ECB alloted $40M in 7-day USD liquidity operation
- (EU) ECB allotted €19.1B in 91-day refi tender
- (PO) Portugal Debt Agency (IGCP) sold total €1.301B versus €1.25B indicated in 2016 and 2020 Bonds
- Sold € in 4.2% Oct 2016 OTs; avg yield 4.371% v 4.128% prior; Bid-to-cover: 2.1 x v 2.0x prior (first tap of this issue launched back in Jan 2007)
- Sold € in 4.8% Jun 2020 OTs; avg yield 5.312% v 5.225% prior; Bid-to-cover: 1.8x v 1.8x prior


- Equities:
- As of 5:30am ET Euro Stoxx 50 Index -0.3% at 2,607; DAX Index -0.2% at 5,924; CAC-40 Index -0.3% at 3,480 and FTSE 100 Index -0.2% at 5,146

- Better German IFO data help to sooth recent risk aversion sentiment but concerns over the Portugal bond auction erased any positive momentum. European stocks back in the red as the NY morning approached

- World's biggest miner BHP [
BHP.AU] reported a 47% increase in net profit which came in line with analysts estimates, due to increases in iron ore and copper prices and with a notable increase in base metals revenues. Weak USD had impacted negatively the results by $2.51B. Outlook for short-term was cautious as company expected Chinese growth to decline from recent highs to more sustainable levels of 8% in 2011. Nonetheless, domestic consumption is expected to remain strong in medium term. Short-term outlook for commodities was mixed noting strong demand for copper but softer steel output. In the medium term company expects commodity demand to remain dependent on emerging market. CEO, in follow up comments, stated that the company would be disciplined in the Potash bid implying that BHP would not acquire Potash for more than what it thinks is worth. Industry analysts welcomed but were unsurprised by results and its stance on Potash. They noted the strong cash flow and diversity of the business.
- Heineken [HEIA.NV] traded higher in the open after the results came in slightly higher than estimates. Beer volumes declined by 3.4% which was a better figure than the first quarter's decline of 8.0%. Additionally, the CEE region continues to decline but less sharply than first quarter while African and Middle Eastern region reported an increase in its beer volumes. Outlook was positive especially in
Africa, Asia and Latin America where company expected volumes to continue to grow. Company guided a net profit growth of at least at a low double digit growth and raised its interim dividend.
Disappointing results for Dutch insurer SNS Reaal [SR.NV] whose net income failed to meet expectations and its net premium income and net interest income decreased on a yearly basis. Company was unenthusiastic about the future outlook expecting pressures in the real estate market. Furthermore, unrealized mark-to-market results may impact profit 'sharply'. Company will not pay an interim dividend. Shares were trading 3.3% lower at the open.
- Among
UK names, Tullow Oil [TLW.UK] reported strong results which had increased over the year but disappointed investors by forecasting a delay in the Uganda field due to a tax payments dispute with the government. The government is withholding an approval for Tullow to sell interests in the Ugandan field to Total and China National Offshore Oil Corp and an extension of the drilling license. The CEO while confident that the dispute would be resolved in a matter of weeks, this would nonetheless delay development works. Aggreko [AGK.UK] was up in early trading after reporting an improvement in its results and was positive for the outlook raising expectations.

- Speakers:
Australia PM Gillard commented during a press conference that she had productive discussions with key independent MPs and that she responded positively to all points raised by key non-party lawmakers. She did note that some of their requests go beyond the normal caretaker rules that operate before a new government takes shape. She guaranteed to serve a full term if a deal was reached.
- German IFO: German economy was stable at high level but noted that companies were expecting a slight weakening of export growth
- IFO Abberger commented after the better then expected data that German H1 growth rate could not be sustained but added that there was no cooling seen either. He did caution that
Germany would be impacted if US and Asia slipped back into recession as the main risk to its were from overseas (external) sources. Germany would see slight growth in consumption in 2010 and saw no reason for any change in ECB interest rate policy at this time
- PM Kan and former PM Hatoyama were to meet regarding the upcoming DPJ leadership race to be held on Sept 14th
- Spain revised its 2009
GDP to -3.7% from -3.6% prior; cites weaker exports - Stats Agency
- Greece Fin Min reiterated that there was no issue of debt restructuring. He added that the current Greek recession had been more shallow than expected and that the 2010
GDP could contract less than 4%
- German Farm Association expected its 2010 domestic grain harvest to decline to 43.9M tons v 49.7M y/y on weather conditions
- Turkey Econ Min commented that the country might not reach its privatization goal in 2010. He noted that upcoming discussion with IMF to be about its regular review and reiterates Gov't view that there is no need for new financing deal with IMF

- Currencies/Fixed Income:
- The session saw a reprieve from recent trends aided by a better German IFO series. EUR/USD tested 1.2725 in the aftermath of IFO but the level continued to act as fierce resistance in recent sessions and proved to be the case once again. Concerns over the
Portugal debt auction following the Moody sovereign downgrade of Irish debt during Asia weighed upon the Euro as the NY morning approached. EUR/USD at 1.2670 as the NY approached. The JPY was off its multi-year highs as Japanese officials and press report continue to point out how evil a strong JPY currency could be. Japan: Dealers noted that despite the numerous comments there was little chance of successful action to stem the JPY trend. Nonetheless the USD/JPY was up over 30 pips from the Tokyo open and trading at 84.50 heading into the NY morning. EUR/CHF cross was off its all-time lows registered in late Asia under the 1.30 handle and now little change from the Far East open.

- In the Papers-Geopolitical:
- In
Germany it was reported that the country's Cabinet approved the bank restructuring bill, as expected. The bill is to allow for the orderly restructuring of failed banks, and may include a bank tax which will be used to finance a restructuring fund.
- Following S&P's downgrade of
Ireland's long-term sovereign rating, the Irish Debt Agency (NTMA) stated that the ratings were based on extreme estimates of bank recapitalisation costs. Also it believed that the S&P's approach was flawed, placing no value to current assets of bad banks. The Financial Times Alphaville also added comments on Ireland's downgrade. According to Otis Casey of Markit, the downgrade confirmed what the credit default swaps (CDS) market was already signaling, but does note that there may be a market impact to the news when London opens.
- The Telegraph's Ambrose Evans-Pritchard commented on how equity traders are becoming more concerned about an economic slowdown. He noted that until recently, equity markets have downplayed the risks of a slowdown in the
US and southern Europe. With respect to reports of disagreements at the Fed about the central bank's recent easing measures, there is no agreement at the Fed on additional monetary actions and some at the central bank are concerned that the Fed does not have the means to help the economy rebound. Regarding the yen, he cites Goldman Sachs, stating that the Japanese currency is overvalued by about 20%.
In the Telegraph,
Britain's HM Revenue & Customs survey found about 1 in 5 British companies are considering re-domiciling due to disenchantment with UK taxes reflecting the negative business sentiment in the country.

***Looking Ahead***
- (BR) Brazil July Central Gov't Budget (BRL) 3.0Be v 630M prior
- 6:00 (RU) Russia to Sell Up to RUB15B in OFZ Bonds
- 7:00 (US) MBA Mortgage Applications w/e Aug 20th: No est v 13.0% prior
- 7:30 (GE) German Chancellor Merkel meets with Slovak PM Radicova
- 8:30 (GE) German Fin Min Schaeuble at press event
- 8:30 (US) July Durable Goods Orders: 3.0%e v -1.2% (revised); Drables Ex Transportation: 0.5%e v -0.9% prior (revised); Cap Goods Orders Non-defense: No est v 0.2% prior; Cap Goods Shipments Non-defense Ex Air: No est v 0.5% prior
- 9:00 (CA) Canada Teranet/National Bank House Price Index: No est v 13.6% prior
- 9:30 (BR) Brazil July Nominal Budget Balance (BRL): No est v -13.6B prior; Primary Budget Balance: No est v 2.1B prior; Net Debt /GDP ratio: No est v 41.4% prior
- 9:30 (TU) Turkey Aug Capacity Utilization: No est v 74.7% prior; Industrial Confidence: No est v 112.7 prior
- 10:00 (US) July New Home Sales: 330Ke v 330K prior
- 10:00 (US) Jun House Price Purchase Index M/M: 0.1%e v 0.5% prior; Q/Q: -0.4%e v -1.9% prior
- 10:00 (MX) Q2 Current Account Balance: -$659Me v -$765M prior; GDP Y/Y: 12.3%e v 9.9% prior
- 10:00 (MX) July Unemployment Rate: 5.5%e v 5.1% prior
- 10:30 (US) DOE weekly energy inventories: Crude: +400Ke; Gasoline: -300Ke; Distillate: +1Me; Utilization: 89.5%e
- 12:00 (FR) France July Net Change Jobseekers: +14.0Ke v -8.6K prior; Total Jobseekers: No est v 2.69M prior
- 13:00 (US) Treasury to Sell $36B in 5-Year Notes



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