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Friday October 22, 2010 - 09:59:14 GMT
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European Market Update: Market analysis the Geithner G20 proposal of Current Account/GDP target (TTN)

Friday, October 22, 2010 5:55:09 AM

 European Market Update: Market analysis the Geithner G20 proposal of Current Account/GDP target


***Economic Data***
- (FR) France Oct Business Overall Demand Survey: 16 v 21 prior
- (AS) Austria Aug Industrial Production M/M: 1.3% v 0.3% prior; Y/Y: 8.2% v 6.8% prior
- (GE) Germany Oct IFO Business Climate: 107.6v 106.5e; Current Assessment: 110.2 v 110.0e; Expectations Survey: 105.1 v 102.9e
- (IT) Italy Aug Retail Sales M/M: 0.0% v 0.0%e; Y/Y: 0.3% v 1.5%e
- (NO) Norway Q3 Existing Homes Q/Q: -0.5% v 3.7% prior
- (TT) Taiwan Sept Unemployment Rate: 5.1% v 5.1%e v 5.1% prior
- (PD) Central/Eastern European Oct ZEW Indicator: 19.3 v 17.3 prior
- (MA) Malaysia Sept
CPI Y/Y: 1.8% v 2.1%e

- US Tsy Geithner sends letter to G20 and seek to target Current Account to
GDP; Emerging markets with undervalued fx and soild reserves must adjust fx within fundamentals. G20 nations should not weaken or prevent appreciation of undervalued ccy's.
- IFO data suggested that the recovery in
Germany was broadening and strengthening
- Fed's Hoenig (voter): Excessive liquidity can lead to very bad outcomes.
- Fed's Bullard: No decision on QE2 until Nov meeting and certainly not before Q3 GDP is known (Oct 29).

FTSE100 -0.49% at 5729, CAC40 -0.23% at 3869, DAX -0.16% at 6600, EuroStoxx50 -0.33% at 2872

- European shares opened lower retreating from their 6-month high tracking Wall Street losses and ahead of G20 currency meeting. Corporate earnings were positive providing some support. Ericsson [ERICB.SW] gained 5.8% in the European session after exceeding results. Sales grew 2% and came in line with estimates. Company said that the continuing component shortage had negatively affected the sales - a concern shared by its other peers as well. Margins had also improved on a yearly basis thanks to sales from network upgrades and cost cuts. Fourth quarter sales are not expected to exceed the Q3 level.
- Swedish truck maker Volvo [VOLVA.SW] reported net earnings exceeding expectations while revenues came in line although sales had grown 32% on a yearly basis. Emerging markets had provided a boost to the sales. Shares were trading slightly lower. Swedish engineer Alfa Laval [ALFA.SW] dropped approx 3% despite beating estimates with analysts citing profit taking especially after company guided a flat fourth quarter.
- Swiss Nestle [NESN.SZ] also exceeded market expectations reporting an organic growth of 6% vs estimates of 5.6%. Company reiterated outlook for its Food & Beverage business and despite noting a growing momentum into Q3, noted that there would be challenging comparatives in Q4. Shares dropped less than 1%.
- French aerospace supplier Safran [SAF.FR] reported an increase in sales which exceeded analysts estimates and confirmed its outlook given positive trends in the market. Also reported a positive currency impact of €112M.
Spanish bank Bankinter [BKT.SP] followed its local peers trend and reported an increase in bad loans ratio.

- Treasury Sec Geithner sent a letter to G20 members and it highlighted that G20 should target current account/
GDP balance. G20 nations should refrain from currency policy designed to achieve a competitive advantage. Emerging economies with undervalued currencies and solid FX Reserves must adjust FX to within fundamentals
- Canada Fin Min Flaherty stated that the Geithner's G20 proposal to target current account/GDP had merits and would allow for variations depending on country. He added that G20 had agreed on the direction of changes needed in FX
- French document looks at the pros and cons of the G20's US Proposal to target current account. It noted that Current account target had important political and practical advantages and could ease currency tension. However, the proposal was a very complex plan to implement and labeled it 'analytically and economically unsound'
- Russia Deputy Fin Min commented that the G20 draft communiqudid NOT mention numeric targets for current account/GDP target but a Japanese MOF official stated that it could be less than 4%
- China Assistant Central Banker commented that Japan had no other alternative but to perform currency intervention to weaken the JPY. He noted imbalances with the Euro Zone were worsening. The EU Sovereign debt crisis had eased but was not solved
Italy think tank REF released new forecasts and stated that Italy showed a structural deterioration that could mean prolonged deflationary period and lower growth. It forecasted Italy's Debt to GDP ratio at 122.2 in 2012.
- ECB's Nowotny commented that the Euro rise in short term would not have consequences but would dampen exports in the long run. He view the Euro currency as relatively high but added it was seen with 'composure'. He reiterated that currency rates are market-determined and that ECB currency intervention would conflict with its main objective of price stability.
- IFO members were vocal on the FX front following the German IFO data. IFO Economists noted that the German economic engine was running smoothly and expected more manufacturing companies plan to add to its staff
- IFO's Nerb stated that the German exports was not so affected by rise in Euro currency.
Germany's manufacturing sector could weather some storms brewing on the FX front and he expected German consumption to pick up as wages would rise
- IFO Abberger commented that tensions over currencies were a danger for the global economy and any excessive rise in Euro currency could weigh on exports. The CNY currency needed to rise in order to avoid imbalance in global trade. He added that there was no pressure on ECB to act as inflation was not a problem
- Eurostat released its second estimate of European 2009 budget deficits. It delayed its publication of Greek govt debt stats for more investigation
- Poland Finance Ministry published a revised GDP report and now saw 2010 debt to GDP ratio at 55.4%
- BoE Sentence reiterated that he was in favor of gradual rise in interest rates to reflect turnaround of global economy and
UK growth.

- The USD saw a choppy session as cross currents of flows and news exhibited its wrath. Between the expected Fed QE move and the weekend G20 Fin Min meeting provided both side of the coin for price action.
- The USD weakened on the back of the US Sec Geithner letter to G20 but remained within established ranges but the fact Forex would be discussed provided a reprieve towards any tension within the group. IFO data suggested that the recovery in
Germany was broadening and strengthening and holding up much better than feared in the second half of the year. However, comments from an Italian think tank softened any euphoria for the Euro as it noted that the country had a structural deterioration that could mean prolonged deflationary period and lower growth. Eurostat publication of its second estimate of European 2009 budget deficits was a mixed bag. Overall the USD is still within the weekly range. EUR/USD just above the 1.39 level heading into the NY morning but the CHF was dramatically softer against the major pairs with dealers citing "repositioning' ahead of G20.
The USD/JPY remained deadlocked around the 81.00 area.

Geopolitical/ In the papers:
- The Telegraph reported that Gilt yields during yesterday's session hit record lows following hints of possible of quantitative easing (QE). If the Chancellor Osborne saving plan is considered to be too much, he indicated needed support by the Bank of England. The article noted that 2-year gilts fell to as low as 0.56%, the lowest on record since it began in the early 1990s. Yesterday Moody's reported that
UK spending plans appear consistent with a Stable Outlook. The Agency is to provide additional details on the UK situation in coming days. Also on the same day, Fitch said the spending review was consistent with the June 2010 budget, and the UK maintaining its sovereign 'AAA' rating.
- This week once again ended in
France's continued struggle with pension reforms. France unions called for two additional days of protest. Six French unions announced that the days of protest will be on the 28th of October and the 6th of November. This will mark the 7th and 8th day, respectively, of action against the proposed reforms. The unions are to strike regardless of the passage of the pension bill. Ports at the Fos-Lavera also provided updates to the strike situation, now exceeding 25 consecutive days. The France Port Authority today said that a total of 71 ships and four barges are delayed due to strike action.
- In the Financial Times, US Regulators have softened their positions on banks paying dividends and repurchasing shares. The move could lead to banks returning more capital to shareholders.

***Looking Ahead ***
- 7:00 (CA) Canada Sept Consumer Price Index M/M: % v 0.1%e; Y/Y: % v 1.9%e
- 7:00 (CA) Canada Sept CPI Core M/M: % v 0.3%e ; Y/Y: % v 1.6%e
- 8:00 US 196) Fed's Plosser Speaks at Media Seminar on Regulatory Reform
- 8:30 (CA) Canada Aug Retail Sales M/M: -0.1%e v -0.1% prior; Retail Sales Less Autos M/M: +0.5%e v -0.4% prior
- 9:00 (BE) Belgium Oct Business Confidence: -3.8e v -3.4 prior
- 10:00 (MX) Mexico Sept Preliminary Trade Balance: -$911M v -$699M prior
- 10:00 (MX) Mexico Sept Unemployment Rate: 5.4%e v 5.4% prior
- 12:00 ECB's Costa Speaks at conference in Lisbon
- 15:00 (AR) Argentina Sept Trade Balance: $915Me v $1.1B prior
- 15:00 (AR) Argentina Sept Industrial Production M/M: No est v 2.0% prior; Y/Y: 9.4%e v 10.1% prior
- 15:00 (AR) Argentina Aug Economic Activity Index M/M: No est v -0.2% prior; Y/Y: 8.8%e v 8.1% prior
- (SK) Weekend G20 Finance Ministers and Central Bank Governors meeting



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