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European Market Update: UK Advanced Q3 GDP exceeds expectations; Sweden alters its rate path outlook (TTN)

Tuesday, October 26, 2010 5:50:49 AM

 European Market Update: UK Advanced Q3 GDP exceeds expectations; Sweden alters its rate path outlook


***Economic Data***
- (GE) Germany Nov GfK Consumer Confidence: 4.9 v 5.1e
- (GE) Germany Sept Import Price Index M/M: 0.3% v 0.2%e; Y/Y: 9.9% v 9.7%e
- (FI) Finland Sept Unemployment Rate: 7.0% v 7.3% prior
- (SZ) Swiss Sept UBS Consumption Indicator: 1.698v 1.945 prior
- (FR) France Oct Consumer Confidence: v -34 v -37e
- (SP) Spain Aug Mortgages-capital loaned Y/Y: -15.7% v -15.9% prior; Mortgages on Houses Y/Y: -3.4% v -6.8% prior
- (SW) Sweden Central Bank (Riksbank) raised the Repo Rate by 25bps to 1.00%; as expected. Lowers expectations of future rate path
- (SW) Sweden Sept Trade Balance (SEK): 8.1B v 5.0Be
- (SW) Sweden Sept PPI M/M: 0.4% v 0.0%e; Y/Y: 2.6% v 2.2%e
- (IT) Italy Oct Consumer Confidence: 107.7 v 106.5e
- (NV) Netherlands Oct Producer Confidence: +0.5v -0.4e
- (PD) Poland Sept Retail Sales M/M: +1.2% v -0.4%e; Y/Y: 8.6% v 6.7%e
- (PD) Poland Sept Unemployment Rate: 11.5% v 11.4%e
- (HK) Hong Kong Sept Trade Balance (HKD): -24.4B v -17.8Be; Exports Y/Y: 24.1% v 30.0%e; Imports Y/Y: 19.5% v 21.2%e
- (UK) Q3 Advanced GDP Q/Q: 0.8% v 0.4%e; Y/Y: 2.8% v 2.4%e
- (UK) Aug Index of Services M/M: 0.6% v 0.2%e; 3M/3M: 0.3% v 0.4%e
- (IC) Iceland Q3 Unemployment Rate: 6.4% v 8.7% prior
- (SP) Spain Q3 Business Confidence: -17.3 v -14.8 prior
- (SA) South Africa Q3 Unemployment Rate: 25.3% v 25.2% prior

Fixed Income
- (SP) Spain Debt Agency (Tesoro) sells total €3.2B vs. €3-4B indicated in 3-month and 6-month Bills
- Sold €1.695B in 3-month bills, avg yield 0.951% v 0.685% prior, Bid-to-cover 2.8x v 3.0x prior
- Sold €1.488B in 6-month bills, avg yield 1.285% v 1.180% prior, Bid-to-cover 2.08x v 2.0x prior
- (IT) Italy Debt Agency (Tesoro) sold €9.0B vs. €9.0B indicated in 6-month Bills; avg yield 1.203% v 1.061% prior; Bid-to-cover: 1.65x v 1.63x prior
- (SA) South Africa sold total ZAR2.2B (as expected in R203 and R207 Bonds
- (EU) ECB allotted €183.4B in its 7-Day Main Refi Tender at fixed 1.00%; recd 190 bids v 151 prior
- (HU) Hungary Debt Agency sold
HUF45B in 3-Month Bills; avg yield 5.25% v 5.26% prior

- Sweden Central bank raises interest rates but then lowers expectations of the pace of future repo rate increases
- UK Q3 Advanced GDP exceeds expectations with its +0.8% q/q raeding
- National interest doubts arise over Singapore's SGX proposed takeover of Australia's ASX.
- Spot Copper hits 27 month highs. Cotton new all time highs at 1.28/lb
US 5-year TIPS auction draws negative yield for the first time
- Fed's Hoenig hawkish on interest rates.
- ECB member Weber will not change his stripes to become ECB head.
- Pimco's El-Erian expects Greek default in 3 years

- FTSE100 at 5704, -0.83%, CAC40 at 3841, -0.74%, DAX at 6619, at -0.29%, Eurostoxx50 2853, at -0.63%

- European shares opened lower pressured by basic resources after world's largest steel maker Arcelor Mittal [MT.NV] issued a cautious outlook for Q4. Figures came in line with expectations but company remained cautious on Q4 as operating costs are expected to increase due to higher raw material prices. Also noted that Chinese demand growth was negative in Q3 and 2011 outlook remained hard to predict. Shares fell 5.1% at the open. Banks also weighed on the market after UBS [UBSN.SZ] reported disappointing figures. Following the trend of its home rival, Credit Suisse, UBS's results were even worse as they were hit by a loss in investment banking pretax profit. Just like Credit Suisse, UBS cited low client activity and strong Swiss franc against major pairs. UBS missed on profit and revenues but topped estimates on net thanks to a one-time credit tax. Trading income had also fallen on a quarterly basis while fixed income, currencies and commodities revenues declined quarter on quarter mainly on below average client activity in foreign exchange and rates businesses. A brighter spot in these results is the net flows in bank's Wealth Management division, the first in two years. Despite these results, which were badly received in the market, the executives were upbeat over the Q4 outlook expecting improved revenues in wealth management and investment bank businesses.
- Out of
Germany, major names such as Merck KGaA, MTU, Software AG and Puma reported Q3 results as well. Merck KGaA [MRK.GE] net profit was below estimates despite a 46% increase. Company also cut the FY10 guidance for liquid crystals due to lower demand and overstocking. However, company raised its core operating result for 2010. Shares opened up by 1% at the open. MTU [MTX.GE] reported results in line with estimates and confirmed its 2010 outlook. Company also gave an outlook for 2011, expecting to record high single-digit growth in revenues in 2011. Software [SOW.GE] reported better than expected results and raised its FY10 earnings growth outlook. Puma [PUM.GE] traded higher as company beat estimates and raised its revenue outlook for 2010. Company reported that Greek jv irregularities would affect 2010 and prior year results.
- Vestas [VWS.DE] results were higher than expected but wind turbine shipments had decreased 27% on a yearly basis and company noted that 2011 market outlook for the wind market was weaker. Company underlined that 2011 was to remain very uncertain. Air Liquide [AI.FR] reported in line with estimates and reiterated FY10 guidance of net profit growth in 2010
Out of the
UK, Arm Holdings [ARM.UK] reported an increase in profit while revenue beat estimates. For Q4 company expected a sequential dollar revenue growth. Profitabilitu had slightly decreased over the quarter.

- The Swedish Central Bank raised its key rate by 25bps to 1.0% as expected but lowered expectations of the pace of the future Repo rate path. The Riksbank stated that the
interest Rate Path did not need to be raised as much in coming years. It now forecasted that Q4 2012 Repo Rate at 2.9% versus the 3.3% prior from its Sept policy meeting.
German Econ Min Bruederle commented that safeguarding rare earth supplies was crucial and warned that currency manipulation could distort trade. Must keep rare earth supply open and stressed that
China needed to know its policy was not a one way street. Raw materials should be on the G20 agenda in South Korea. The minister also criticizes US's G20 proposal and noted that currency intervention was not the way to strengthen exports. Competitiveness was key to export success. He labeled theUS proposal for export quotas as a concern relating to a planned economy mentality
India Fin Min Mukherjee commented that the country was on the path towards regaining its pre-crisis growth momentum. India's economic recovery was broad-based with consumption growth moving towards trend levels. India intended to have gradual and sequential exit from fiscal stimulus measures. Fiscal consolidation to remain supportive of medium-term growth with focus on long-term sustainability
- India Finance Ministry Report stated that
India's economic growth expected to be 8.5% to 9.7% in FY11 supported by domestic demand. Monetary tightening should not adversely affect pace of recovery. The easing liquidity was temporarily consistent with monetary policy stance of calibrated exit.
- South Korea Central Bank Sept minutes showed that two members were opposed to maintaining interest rates steady at the 2.25% level and called for 25bps increase; The vote was 4 to 2 to maintain rates at 2.25%
- Chancellor Osborne commented after the Q3 GDP data that the better data should underpin UK confidence
- UK think tank NIESR stated that UK Q3 GDP data weakened the case for further BOE stimulus but saw slower growth in Q4;
- Germany Assoc lowered its 2010 Construction Sales forecast to -1.5% from -0.7% prior view but adjusted its 2011 view to -1.5% from -2.0% prior
- Bank of Greece commented that the main priority to successful plan execution to avoid any debt restructuring . It saw no more room for tax increases and reiterated view that Gov't must do more to fix the public finance situation
- Reportedly France and Germany have no deal on possible ECB succession plan coupled with EU fiscal accord - German official
- Ireland Debt Agency (NTMA) stated that it planned to reenter markets in Q1 2011

The GBP currency was firmer from the get go in the session on chatter that the UK GDP data would exceed expectations. GBP/USD hit session highs at 1.5870 after
UK preliminary Q3 GDP came in at +0.8% q/q well above the +0.4%e. The YoY reading of +2.8% was the highest since Q3 2007.
The SEK weakened against the USD and EUR pairs after the Riksbank toned down the pace of future interest rate increases.
Overall the USD put in a mixed performance in the session as market participants put aside the current theme of their expectations about the size of Fed quantitative easing as next week's FOMC meeting. EUR/USD little changed at 1.3935 as the NY morning approached. USD/JPY managed to climb back above the 81 handle but fell short of the alleged USD buy stops over the 81.50 area.

Geopolitical/ In the papers:
- In Irish press, according to Canadian rating agency DBRS, Anglo Irish Bank's offer to buy out its subordinated debt holders is similar to a default. The article also citing
BNP sources said the offer could trigger payouts of €300 million on credit default swap contracts.
- The 'Heard on the Street' section of the Wall Street Journal commented on the impact of G20 towards preventing a currency war. The agreement by finance ministers to reduce global imbalances was furthered than what was initially expected, but did note the absence of a time frame and some mixed messages. The article mentions that the G20 is leaving the door open to measures supporting 'price stability'.
Britain and Switzerland reached an agreement for a stricter tax withholding system that also preserves the secrecy of Swiss banks. According to the Financial Times article, there was a compromise to apply to about £100-125 billion in UK investors' Swiss bank deposits.
- Following up on strike plans announced on the 12th of October, German trade unions initiated strikes today. It is expected that the strike will affect millions of commuters. The unions did not disclose the times or the locations of the stoppages from Tuesday, but labor sources said rolling stoppages of two hours apiece were planned. The unions are protesting against wage discrepancies.

***Looking Ahead ***
- 6:00 (BR) Brazil Oct FGV Construction Costs M/M: % v 0.2%e v 0.2% prior
- 6:00 (IR) Ireland Sept PPI M/M: % v 0.2% prior; Y/Y: % v 0.5% prior
- 7:00 (EU) ECB Drains €63.5B in 7-day Term Deposit tender
- 7:45 (US) Weekly ICSC Chain Store Sales
- 8:30 (BR) Brazil Sept Private Banks Lending (BRL): No est v $912B prior; Total Outstanding Loans: no est v $1.580T prior
- 8:55 (US) Weekly Redbook Retail Sales
- 9:00 (US) Aug S&P/CaseShiller Home Price Indes: No est v 148.91 prior; Composite-20 Y/Y: 2.5%e v 3.18% prior
- 9:30 (EU) ECB Calls for Bids in 3-Month Tender
- 10:00 (US) Oct Consumer Confidence: 49.5e v 48.5 prior
- 10:00 (US) Aug House Price Index M/M: -0.2%e v -0.5% prior
- 10:00 (US) Oct Richmond Fed Manufacturing Index: +1e v -2 prior
- 10:00 (EU) EU Panel Debates Resolution on ECB's 2009 Report
- 11:00 (US) Fed to Purchases Notes/Bonds
- 12:00 (FR) France Sept Net Change Jobseekers: No est v 15.9K prior; Total Jobseekers: No est v 2.693M
- 12:30 (EU) De Gucht Speaks in Debate on EU-China Relations
- 13:00 (US) Treasury to sell $35.0B in 2-year Notes
- 15:00 (AR) Argentina Sept Shop Center Sales Y/Y: No est v 25.1% prior
- 16:30 (US) Weekly EIA Energy Inventories
- 16:30 (US) Fed's Dudley to Speak at University of Rochester



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