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Tuesday October 5, 2010 - 10:01:18 GMT
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European Market Update: Precious metals continue upward price trend and action weighs on greenback (TTN)

Tuesday, October 05, 2010 5:56:17 AM

 European Market Update: Precious metals continue upward price trend and action weighs on greenback


***Economic Data***
- (IN) India Sept Markit Services PMI: 55.6 v 59.3 prior
- (IR) Ireland Sept NCB Services PMI: 48.8 v 52.9 prior ; First move below the 50 level since March
- (ID) Bank Indonesia Interest Rate maintained the Reference Rate at 6.50%; As expected
- (SP) Spain Sept Services PMI: 47.9 v 49.2 prior
- (SZ) Swiss Sept CPI M/M: 0.0% v 0.0%e; Y/Y: 0.3% v 0.3%e
- (IT) Italy Sept PMI Services: 51.3 v 50.6e
- (FR) France Sept Final PMI Services: 58.2 v 58.8e
- (GE) Germany Sept Final PMI Services: 54.9 v 54.6e
- (EU) Euro Zone Sept Final PMI Services 54.1 v 53.6e; PMI Composite: 54.1 v 53.8 prior
- (TT) Taiwan Sept CPI Y/Y: 0.3% v 0.4%e; WPI Y/Y: % v 3.7%e v 3.4% prior
- (UK) Sept PMI Services: 52.8 v 51.0e
- (EU) Euro Zone Retail Sales M/M: -0.4% v +0.2%e; ; Y/Y: 0.6% v 1.3%e

Fixed income:
- (DE) Denmark Debt Agency sold DKK1.8B v 3.0B indicated in 4.0% 2019 Bonds; avg yield 2.34%; Bid-to-cover: 2.01x
- (EU) ECB allots €197.1B in its main7-day refi operation at fixed 1.0%
- (AS) Austria Debt Agency (AFFA) sells total €1.5B in 2011 and 2037 Bonds vs. €1.5B indicated
- Sold €800M in 3.50% September 2021 RAGBs; avg yield 2.811% v 3.598% prior; Bid-to-Cover: 2.7x v 1.8x prior
- Sold €600M in 4.15% March 2037 RAGBs; avg yield 3.282% v 3.727% prior; Bid-to-Cover: 2.3x v 2.1x prior
- (HU) Hungary Debt Agency sells HUF40B in 3-month Bills vs. HUF40B planned; avg yield 5.28%
- (UK) DMO sold £925M in 0.625% index-linked 2042 Gilts; avg yield 0.607%; Bid-to-cover: 1.96x

- Notes/Observations:
- Central bank rate 'surprises' in session as Australia's RBA leaves rates unchanged; BoJ cuts rates to zero.
- EU officials comment on the need for CNY currency appreciation; appreciate China supports for peripherals debt
- Major European PMI Services final readings better than prelim; but some cracks Spain's readings
- Euro Zone Aug Retail Sales miss analyst estimates
- Gold at record levels while silver hits 30-year highs and reflected in USD price action.
- Currency wars heating up: Brazil again raises tax on foreign inflows. Thailand studying capital flow measures
- FT: Call for new global currency agreement and coordinated action urged.
- Dealers looking ahead at key events: ISM Services today, Corp earning season moving into high gear. Also more key central bank rate decisions with ECB and BOE on Thursday; US payrolls data on Friday. The reserve currency issue might also heat up as G7 and IMF meetings in Washington DC

- Equities:
- As of 05:10 am Euro Stoxx +0.6% at 2,718; FTSE100 +0.6% at 5,588; CAC40 +0.8% at 3,677; DAX +0.3% at 6,152
- European shares opened higher today and remained in positive territory throughout the session as EU macro data was better than expected. Also BoJ's decision to lower overnight rates to 0.0%-0.1% while stating it would consider expanding the fund if necessary helped boost European markets and prevented further losses. The volume however was light. In the meantime, Moody's placed Ireland's sovereign ratings on review for a possible downgrade which would likely be limited to a notch. Note that the two other rating agencies have already downgraded Ireland and Moody's is most likely trying to catch up with its peers - similar to the decision to downgrade Spain's sovereign ratings which came later than S&P and Fitch.
- In individual names UK travel company Tui Travel [TT.UK] opened 2% higher after its trading update where it stated that summer 2011 trading had started well and the net debt would be lower than prior expectations. UK retailer Tesco [TSCO.UK] were up 1.8% following its first half results which came in line with expectations. Company reported an overall growth in its business lines and was optimistic on the macroeconomic outlook and its exposure to emerging markets. Its Tesco Bank business reported decreasing debt levels and its gross profit had grown 11.7% on a yearly basis. British satellite telecom company Inmarsat [ISAT.UK] opened down by 3.7% after Harbinger confirmed it would sell 60K shares which constitutes 13% of company's shares.

- Speakers:
- Moody's placed Ireland's "Aa2" sovereign rating on review for possible downgrade and noted that any downgrade would be by 1 notch. The rating agency stated that several factors prompted the review that included increased uncertainty regarding Ireland's ability to preserve government financial strength after additional bank recapitalization measures announced on 30 September; The clouded outlook for the recovery of domestic demand in light of recently published data.
- Moody's analyst Hornung added some color and stated that outside help was not likely needed for Ireland and expected additional fiscal measures from their govt in its 4-year plan. He added that Ireland did not have a liquidity issue and its economic flexibility and competitiveness distinguish it from other European periphery countries.
- Moody's raised Turkey's sovereign outlook to "Positive" from "Stable". The upward revision was due to improvements in the economy and fiscal resilience. It noted that a potential upgrade to Ba1 was contingent upon a further strengthening of Turkey's fiscal fundamentals, particularly in light of the country's significant external vulnerabilities
- EU officials commented about the Chinese currency following the conclusion of the EU-China summit in Brussels. EU's Juncker stated that China's Yuan currency continued to remain undervalued. EU Commissioner Rehn added that China's structural reforms aimed at rebalancing the economy should be complemented by an appreciation of the yuan. ECB Trichet commented that FX flexibility was very much in the interest of China and Appreciated China's purchase of Greece gov't bonds
France Fin Min Lagarde stated that discussion regarding yuan-dollar should be more multi-lateral and should include Russia and China in such discussions
- India Central Bank (RBI) dep Gov Gokarn commented that the normalizing of policy was near its completion and that further action regarding interest rates rates depended on growth and inflation data. He did note that inflation remained well above upper range of its comfort zone> he added that the RBI would respond to capital inflows if there are signs of disruption.
- Thailand Central Bank expressed some concern over Baht currency appreciation trend and added that it was studying capital flow measures. The central bank noted that if interest rates are raised it will not impact fund inflows too much
- Japan BoJ gov Shirakawa commented following the rate decision that longer-term rates have room to move lower and added that the BOJ's Board median forecast were now bleaker than before. The BOJ to pursue powerful easing under zero interest rate policy and targeting lower two-year interest rates. He stated that the global economic recovery to slow.
- Japan Fin Min Noda commented that he hoped that actions by BoJ would stabilize the Yen currency but had no comments regarding fx market moves
- Japan Econ Min Kaieda: Govt to continue monitoring currency movements 'closely' and that the BoJ movements corresponded with PM Kan's expectations. The minister added that he believed that the financial markets were taking the BoJ moves positively.
- eforms need to be front-loaded to mitigate corporate slowdown.
- EU Commission issued its quarterly report for the Euro Zone. It noted that there remained liquidity issues for Euro region banks. It reiterated the view that the economic recovery in Euro region was moderate and likely to be uneven with risks remaining. Low corporate investment threatens economic growth.

- Currencies: The USD endured a softer tone throughout the European morning - even against the JPY as numerous rumors surfaced about Far East interest in the Europe and precious metals with both Korea and china mentioned as buyers. The session began with dealer chatter of good interest in 1.42 calls in EUR/USD pair. The overall price action saw the USD Index falls below 78.00 for the first time since late January. Spot gold at fresh record highs above the $1,328/oz level while silver hits its highest level in three decades at $22.25/oz. The Euro seemed to be aided by some interest rate factors with dealers noting that the spread between the 2-year German/US Gov't bonds over 40bps (was around 25bps just last week). The USD/JPY pair failed to moved above the 84.00 level despite more easing and QE measures out of Japan. USD/JPY was below 83.40 just ahead of the NY morning. However the JPY remained softer against other European pairs with EUR/JPY just off session highs and hovering the 115 level.

- Geopolitical/ In the papers: :
- The Wall Street Journal's Currency section reviewed the factors behind the euro currency decline yesterday. According to an analyst at Nomura Securities, at current levels, most quantitative easing may already be priced in the US dollar. In addition, ING Capital Markets analyst John McCarthy said he does not believe the EU's sovereign related issues are going away, and is not sure how many people are willing to buy EUR/USD at $1.38 or $1.39.
- Roman Abramovich's Millhouse Asset Management said that it could take legal action over the government's bailout of Irish Nationwide Building Society in the Telegraph. In 2009, Millhouse bought an unspecified amount of the £124M in subordinated bonds issued by Irish Nationwide.

***Looking Ahead ***
- 7:00 (EU) ECB Term Deposit operations: Expected to drain 63.5B
- 7:45 (US) ICSC Weekly Chain Store Sales
- 8:30 (CL) Chile Central Bank Meeting Minutes
- 8:30 (CL) Chile Aug Economic Activity Y/Y: 7.8%e v 7.1% prior
- 8:55 (US) Weekly Redbook Retail Sales
- 9:00 (EU) ECB weekly reserves
- 9:00 (BR) Brazil Aug CNI Capacity Utilization: 82.4%e v 82.3% prior
- 9:30 (SI) Singapore Sept Purchasing Managers Index50.5e v 49.4 prior; Electronics Sector Index: 51.3e v 50.6 prior
- 10:00 (US) Sept ISM Non-Manufacturing: 52.0e v 51.5 prior
- 16:30 (US) Weekly API energy inventories
- 17:00 (US) ABC Consumer Confidence w/e Oct 3rd: No est v -45 prior



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