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Thursday October 21, 2010 - 10:07:35 GMT
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European Market Update: Euro benefits from PMI data and Upward revision to Germany's official GDP forecasts (TTN)

European Market Update: Euro benefits from PMI data and Upward revision to Germany's official GDP forecasts

***Economic Data***
- (SZ) Swiss Sept Trade Balance (CHF) 1.7B v 1.2Be; Exports M/M: -3.8% v +1.4% prior; Imports M/M; -4.0% v 9.5% prior
- (RU) Russia Gold & Forex Reserve w/e Oct 15th: $503.7B v $501.1B prior
- (IN) India Primary Articles WPI Y/Y w/e Oct 9th: 18.1% v 18.5% prior; Food Articles WPI Y/Y: 15.5% v 16.4% prior
- (FR) France Oct Business Confidence: 102 v 98e; Production Outlook: 9 v 3 prior; Own-Company Production: 16 v 4 prior
- (HU) Hungary Aug Retail Trade Y/Y: 0.0% v 1.0%e
- (FR) France Oct Preliminary PMI Manufacturing: 55.2 v 55.5e; PMI Services: 55.3v 57.5e
- (SZ) Swiss Sept M3 Money Supply Y/Y6.8% v 6.4% prior
- (GE) Germany Oct Preliminary PMI Manufacturing: 56.1 v 54.6e; PMI Services: 56.6 v 54.9e
- (DE) Denmark Oct Consumer Confidence: 0.6 v 1.8e
- (NE) Netherlands Sept Unemployment Rate: 5.3% v 5.3%e
- (SW) Sweden Sept Unemployment Rate: 7.8% v 7.6%e
- (EU) Euro Zone Oct Preliminary PMI Manufacturing: 54.1v 53.2e; PMI Services: v 53.7e; PMI Composite: v 53.7e
- (UK) Sept Retail Sales M/M: -0.2% v 0.3%e; Y/Y: 0.5% v 0.9%e
- (UK) Sept Retail Sales Ex Auto Fuel M/M: 0.0% v 0.2%e; Y/Y: 1.8% v 1.9%e
- (UK) Sept Major Banks Mortgage Approvals: 44K v 44Ke
- (HK) Hong Kong Sept CPI - Composite Index Y/Y: 2.6% v 3.0%e
- (SZ) Swiss Oct Credit Suisse ZEW Expectations Survey: -27.5 v -5.1 prior
- (IC) Iceland Sept Wage Index M/M: 0.3% v 0.0% prior; Y/Y: 6.0% v 6.0% prior

Fixed Income:
- (SP) Spain Debt Agency (Tesoro) sold total €3.8B v €3-4B range in 2025 and 2032 Bonds
- Sold €2.9B in July 4.65% 2025 Bonos; avg yield 4.451% v 5.116% prior; Bid-to-Cover: 1.4x v 2.57x prior
- Sold € in July 5.75% 2032 Bonos; avg yield 4.777% v 4.797% prior; Bid-to-Cover: 1.4x v 1.94x prior
- (FR) France Debt Agency (ATF) sold total €8.5B vs. €7-8.5B range in 2012, 2013 and 2015 Bonds
- Sold €2.61B in 0.75% July 2012 BTAN; avg yield 1.07% v 0.920% prior; Bid-to-cver: 2.28x v 2.35x prior
- Sold €1.31B in 4.50% July 2013 BTAN; avg yield 1.23% v 1.12% prior; Bid-to-cver: 3.71x v 4.4x prior
- Sold €4.5B in 2.00% July 2015 BTAN; avg yield 1.84% v 1.83% prior; Bid-to-cver: 1.88x v 1.88x prior
- (UK) DMO sold £3.0B in 3.75% 2020 Gilts; avg yield 3.055% v 3.215% prior; Bid-to-cover: 2.01x v 1.68x prior; tail 0.2bps

- Treasury Sec Geithner: EUR and JPY now in alignment - no reason for further USD weakness
- Key Chinese data in line: CPI +3.6 v +3.6e (justifies the recent PBoC rate hike); Q3 GDP growth +9.6 v 9.5%e; Shanghai -1% with the rest of Asia mixed.
- Beige Book. Deterioration ended. Economic activity rising but at a modest pace
- Europe PMI data continues to support growth outlook
- Germany formally raises its 2010 and 2011 GDP forecasts
- UK retail sales disappoints

As of 05:35 FTSE100 +0.54% at 5759, CAC40 +0.60% at 3851, DAX +0.40% at 6550, Eurostoxx50 +0.38% at 2862.
- Major European bourses opened down but pared some of their losses continuing to fluctuate during a choppy trading session. FTS100 found support later in the European morning following Chancellor's Osborne who said that BoE is free to deploy monetary tools in order to support the economy. Disappointing earnings from Swiss bank Credit Suisse [CSGN.SZ] pressured the market. The bank missed both on net and revenues while trading profit and investment banking income had both declined significantly on a sequential basis. The reasons provided were low market volumes and subdued market activity which had characterized the quarter. On the other hand, the net new assets had barely increased from last quarter.
- Swedbank [SWEDA.SW] rallied 5.1% after bank swung to net profit due to lower provisions for loan losses, significant increase in trading profit and a slight improvement in the Baltic countries' banks operations. However, credit demand in that region remains low which accounted for a 21% slip in bank's main source of revenue; the net interest income. Spanish bank
Sabadell [SAB.SP] beat analysts estimates on its net profit but reported an increase in provision for losses and non-performing loan ratio. On the other hand capital metrics had slightly deteriorated on a yearly basis.
- Among the gainers, which helped offset banks' losses were French names Danone and Pernod Ricard. Pernod Ricard [RI.FR] was the star of the CAC40 as bank reported a 10% organic growth in Q1 beating estimates boosted by a strong growth in emerging markets. Shares rallied 5.2% at the open. Danone [BN.FR] also rallied by about 2.6% in the early trade following its results which came in line with estimates. Company reiterated its forecast and announced a buyback of around €500M shares. French publishing name Publicis [PUB.FR] opened higher by 1.3% after beating analysts' estimates and giving a confident outlook for 2010 and 2011. Novartis [NOVN.SZ] also traded higher after beating expectations and reiterating its guidance for the remainder of the year/
- Among UK notable names, retailer Debenhams [DEB.UK] reported an increase in pretax profit but sales came in a little softer. Like for like sales were flat and company stated that it expected to reinstate dividend in 2011.
UK bookmaker William Hill [WMH.UK] opened up by 4.2% after reporting a strong growth in retail operating profit.

- China PBoC Gov Zhou commented after the slew of data that
China faced risks from both inflation and asset bubbles . He added that risks were seen in cyclical bad loans and cross-border capital flows and China continued to see strong upward pressure on bank lending. It would be a difficult task to prevent financial system systemic risk.
The IMF presented its Asian-Pacific outlook and again stressed that letting Asian currencies appreciate would help deal with capital inflows. It noted that more monetary tightening was needed in many Asian countries which includes more currency appreciation and that exchange rate appreciation waa major part of rebalancing. Capital inflows to fuel price pressures in
Asia and the region needed to withdraw fiscal stimulus. Growth would moderate in 2011 in the advanced economies while remaining "particularly strong" in China, India and Indonesia. It saw Asia's current account surplus shrinking to about 3.0% of regional GDP in 2010 and 2011 from about 5.0% level exhibeted in 2007
- BOE's Dale commented that the MPC was challenged in balancing policy between target CPI and uncertain economic recovery but added it was important that MPC remained ready to change direction as circumstances change.
- German Finance Ministry released its Sept report and noted that the economy and exports to continue its moderate Growth. The MOF lowered its 2010 Federal Net Borrowings between €50-55B range and cut the public deficit/GDP ratio to 4.0% versus 4.5% prior. It reiterated the view that Q3 GDP be markedly below Q2 levels and expected export momentum to slow over the rest of 2010. It believed the domestic demand to increasingly support growth
Germany formally raised its 2010 and 2011 GDP forecasts. Now saw 2010 GDP at 3.4% versus 1.4% prior view in April and the 2011 GDP at 1.8% from 1.65 prior. The report noted that the economic recovery was being seen in almost every sector of the country and the Germany Gov't should withdraw stimulus measures. Risk to GDP could stem from currency developments and must decisively counter FX manipulation and protectionism
- German Econ Min Bruderle forecasted German GDP growth around 2% over the next five years. The strong Euro was not a problem for Germany's economic upswing and the strength of the currency reflects the broad recovery within the Euro Zone
- BOJ Gov Shirakawa reiterated closely monitoring the impact of strong JPY on economy
- SNB published its monthly bulletin and stated that its Q3 EUR Holdings fell to €90.9B from €121.0B q/q and now accounted for 55.9% of total reserves. It noted that its CAD holdings in Q3 rose to C$9.0B from C$3.8B q/q and its JPY Holdings surged to ¥1.8T from ¥716B q/q (and accounted for 9.7% v 3.9% prior).
- BOE members were vocal after the spending cuts announced by the
UK gov't on Wednesday.
- BOE's Miles commented that he was "guardedly optimistic that economic recovery would continue and noted that the central bank still had policy weapons if necessary. The BOE policy still remained extraordinarily expansionary
- BoE Dale commented in a newspaper interview that he was uncertain the path of interest rates. Inflation was likely to remain above target of the remainder of the year and the economic recovery had a long road to progress. The BOE must be prepared to change views as circumstances dictate. He noted that manufacturing companies were still aided by weaker
GBP currency
BoE Posen: Reiterates UK economic recovery is 'bumpy'; Business soundings suggest the economy is recovering

Currencies: The European session began with dealers testing official resolve on the currency front and took the USD weaker across the board. During
Asia the USD rebounded aided by the WSJ comments from US Tsy Sec Geithner that the USD was in alignment against the JPY and Euro and saw no reason for further USD weakness. BOJ Gov Shirakawa reiterated that the central bank was closely monitoring the impact of strong JPY on its economy. Dealers noted that Far East sovereign demand for Euro was a catalyst throughout the session. The data front was also a positive factor with preliminary PMI data for Germany above expectations. The formal release of the upgrade in Germany's 2010 GDP provided. The EUR/USD was back above the 1.4030 level and about 70 pips above its Asian open levels.
- The USD/JPY hovered around the 81.00 level throughout the session with continued chatter that the Japanese Post Office was support the pair just off its 15-year lows. Also dealers hearing vague chatter that the BOJ was inquiring about 'staffing levels' at its local banks surmising that a second round of solo intervention might be launched at some point.
- The GBP/USD was softer against the major pair and on the defensive all morning. The UK Sept Retail sales data came in below expectations with the headline MoM in negative territory for the second consecutive reading.
GBP/USD was heading into the NY morning under the 1.58 handle and some 60 pips off its Tokyo opening levels.

Geopolitical/ In the papers:
- Following yesterday's announcement of the Comprehensive Spending Review by the British government, Fitch today said the spending review was consistent with the June 2010 budget, and with maintaining its sovereign 'AAA' rating. In addition, ING analysts noted there was a lot of criticism around the 490,000 job cuts, which would push the unemployment rate to 9.3% from the current 7.8%, though the chancellor did state that the job cuts will not come at the same time, and not all job losses will be compulsory. They expect February to be the most likely date for announcing further quantitative easing.
- French unions are to meet Thursday and Friday to decide on whether or not to extend strikes. The strikes may be extending to next week to coincide with the possible passage of pension reform. As of yesterday, unions have participated in the 4th national strike and 6th day of protests over the past couple of months. The protests have placed more than 3,000 petrol stations, approximately 27% of the countries stations, without sufficient supply. The French Industry Minister Estrosi said the government will supply petrol stations by railway, and further stated that the supply situation is slowly returning to normal.
- Irish party leaders met last night in an attempt to reach a consensus on the country's deficit plans. Though no consensus was made, party leaders did agree on a 3% deficit target by 2014. There were media reports speculating that the two main opposition parties may form a coalition if Prime Minster Cowen calls for a snap parliamentary election, a bit of political maneuvering which may give the new government the majority it needs to forward fiscal changes.

***Looking Ahead ***
- (IS) Israel Aug Unemployment Rate: No est v 6.2% prior
- 7:00 (BR) Brazil Sept Unemployment Rate: 6.5%e v 6.7% prior
- 8:00 IMF Presents Regional Economic Outlook for Europe
- 8:00 (PD) Poland Central bank minutes
- 8:30 (CA) Canada Sept Leading Indicators M/M: 0.1%e v 0.5% prior
- 8:30 (US) Initial Jobless Claims: 453Ke v 462K prior; Continuing Claims: 4.420Me v 4.399M prior
- 9:30ish (US) Commercial paper outstanding
- 10:00 (EU) Euro-Zone Oct Advanced Consumer Confidence: -11e v -11 prior
- 10:00 (US) Sept Leading Indicators: 0.3%e v 0.3% prior
- 10:00 (US) Oct Philadelphia Fed: 0.o e (flat) v -0.7 prior
- 10:00 US Fed's Bullard gives opening remarks
- 10:30 (US) EIA weekly natural gas inventories
- 16:00 (US) Aug RPX Composite 28dy Y/Y: No est v -1.0% prior; RPX Composite 28dy Index: No est v 196.35 prior
- 21:45 US Fed's Hoenig to speak in Albuquerque on U.S. Economic Outlook


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