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Wednesday October 27, 2010 - 10:01:21 GMT
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European Market Update: Eonia swap curve lower after demand at ECB 3-month LTRO above market expectations (TTN)

Wednesday, October 27, 2010 5:54:28 AM

 European Market Update: Eonia swap curve lower after demand at ECB 3-month LTRO above market expectations


***Economic Data***
- (FI) Finland Oct Business Confidence 4.0 v 2 prior; Consumer Confidence 20.5 v 22.9 prior
- (FR) France Sept Consumer Spending M/M: 1.5% v 0.4%e; Y/Y: +1.1% v -0.3%e
- (GE) Germany Oct CPI Saxony M/M: 0.0% v 0.1% prior; Y/Y: 1.4% v 1.5% prior
- (SP) Spain Sept Real Retail Sales Y/Y: -2.9% v -1.2%; Adjusted Real Retail Sales Y/Y: -2.9% v -2.5% prior
- (TU) Turkey Sept Trade Balance (TRY): -6.7B v -5.8Be
- (IT) Italy Oct Business Confidence: 99.8 v 98.5e
- (SW) Sweden Sept Household Lending Y/Y: 8.9% v 8.8% prior
- (EU) Euro-Zone M3 Money Supply Y/Y: 1.0% v 1.3%e; M3 Money Supply 3M Avg: 0.8% v 0.9%e
- (GE) Germany Oct CPI Brandenburg M/M: 0.0% v -0.3% prior; Y/Y: 1.0% v 1.0% prior
- (GE) Germany Oct CPI Hesse M/M: -0.1% v -0.1% prior; Y/Y: 1.0% v 1.1% prior
- (TT) Taiwan Sept Leading Index M/M: -0.4% v -0.3% prior; Coincident Index M/M: 0.6% v 0.8% prior
- (IC) Iceland Oct CPI M/M: 0.7% v 0.4%e; Y/Y: 3.3% v 3.0%e
- (GR) Greece Sept PPI Y/Y: 5.8% v 4.6% prior
- (UK) YouGov Oct Year-Ahead CPI expectations at 3.0% v 2.9% prior ; Long-term CPI expectations 3.4% v 3.2% prior
- (SA) South Africa Sept CPI (all items) M/M: % v 0.2%e; Y/Y: % v 3.3%e

Fixed Income:
- (EU) ECB allotted €60M in its 7-day USD liquidity operation at fixed 1.19%
(IT) Italy Debt Agency (Tesoro) Index-Linked Bond results: Sold total €1.58B vs. €1.5B indicated
- Sold €750M in 2.1% I/L 2021 BTPi bonds; avg yield 2.18%
- Sold €826M in 2.55% I/L 2041 BTPi bonds; avg yield 2.58%
- (SW) Sweden Debt Agency sold SEK2.18B vs. SEK2.5B indicated in 5% 2020 Bonds;avg yield 2.866%;
- (EU) ECB allotted €42.5B in 3-Month LTRO full-allotment ender; Rec'd 132 bids
- (PO) Portugal Debt Agency (IGCP) sold total € vs. €750-1.25B Indicated Range in 2014 and 2018 Bonds
- Sold €611M in 3.60% Oct 2014 OTs; avg yield 4.014% v 4.695% prior; Bid-to-cover: 2.8x v 3.5x prior
- Sold € in 4.55% July 2018 OTs; avg yield 5.137% v 4.674% prior; Bid-to-cover: 1.7x v 2.1x prior

- Markets re-position ahead of key US events in coming days with GDP data, mid-term elections and FOMC eyed. Price action related to scaled back QE2 expectations
- Australian CPI dampened RBA rate hike expectations
- US 30-year bond moves back above the 4.0% level
- ECB 3-month LTRO tender saw higher than anticipated demand

European indexes as of 05:47 FTSE100 at 5685, -0.38%, CAC40 at 3860, -0.19%, DAX at 6617, +0.04%, Eurostoxx50 at 2857, -0.06%

- European shares fell at the open and remain in negative territory as dollar strengthened while basic resources dragged the markets down led by
BHP Billiton and Rio Tinto. Investors were concerned over a WSJ report noting that the Fed may unveil a smaller than expected amount of bond purchases. Article noted that the amount would be worth probably around a few hundred billion dollars which is much less than the expected 2 trillion dollars.
- In individual shares, SAP [SAP.GE] was the big blue-chip loser in the DAX falling approx 4% after its preliminary Q3 earnings missed estimates. Revenue had grown 20% and was slightly above estimates. Company reiterated its FY10 outlook disappointing investors who had anticipated more. Furthermore, the unchanged guidance may denote that the company is cautious as it enters Q4. Deutsche Bank [DBK.GE] reported a third quarter loss which was better than estimates. The loss had included the Postbank acquisition charge. Deutsche Bank followed its peers' trend and also reported a loss in investment banking revenue which included the acquisition charge. On sales and trading revenues DB also noted the low client activity during the summer month but its results, despite being lower on a yearly basis, were better than its peers such as Credit Suisse and UBS. A note from
Macquarie analysts observed that the investment banking figures were the best seen so far. Heineken [HEIA.NV] lost about 4% in the European session following its Q3 report. Net profit had increased by 10% but revenue came in lower than expected. Organic volume had declined due to weakness in European markets despite higher volumes in emerging markets. Also noted that the UK was the biggest driver for the Q3 decline in Western Europe. Company reiterated its FY10 guidance. Vokswagen [VOW3.GE] reported a 9-month operating profit which had tripled from its year ago comparable period. Revenues also increased. According to the breakdown, Audi is the driver behind Volkswagen results as deliveries increased 13.6% thanks to Chinese demand for luxury cars. But company was cautious into Q4 noting that the business growth will not continue as strongly into the next quarter.
- Swedish manufacturer Electrolux [
ELUXB.SW] reported a higher than expected operating profit for Q3 but revenues and net came in softer than estimates. Company noted a strong growth in Latin America and Asia/Pacific which had offset partially the decline in sales volume in Europe and North America. Shares rose 1.6% at the open.
Among notable
UK names, BAT [BATS.UK] provided its trading update noting good revenue growth but a decline in volumes of 1%.

- China States Council Q4 Economic Outlook warned that external challenges have increased but pledged to curb excessive gains in home prices in some cities and to maintain agricultural price stability. The State Council made NO mention of either fiscal nor monetary policy
- China political advisor commented that a currency policy was within a country's sovereignty and could not trade a big
CNY appreciation in return for more power at IMF (note: there was renewed market chatter of a imminent CNY revaluation in the works earlier in the session)
- BOE Posen: Financial sector is not fixed at this time but fundamentals of UK economy are sound. He noted that currency and interest rates in the
UK were stable. He noted that if the UK recovery was going to be inflationary it would have been evident by now but had "overshot" a bit on inflation target. He cautioned that have yet to see full impact of deficit cutting measures as business and consumers werestill facing serious pressures.
- ECB's Stark commented that the central bank's Gov't bond buying program did not affect its monetary policy and only using non-standard measures to keep prices stable. He stated that there were no alternative to ambitious deficit reduction and reiterates the view that the EMU needed to de-politicize the decision making process. Sanctions should have a more automatic nature. Financial crisis was not over but normalizing of money markets has continued. Parts within the Euro zone was close to having self-sustaining economic recovery and to continue at a moderate pace.
Greece Fin Min Papaconstantinou commented that the 2009 Deficit-to-GDP to be revised above 15% from the Eurostat April estimate of 13.7% but stressed that
Greece remained on track to meet fiscal 2010 targets. He forecasted that the Greek economy to contract between 2.5% and 3% in 2011

- Dealers noted that over the last 24 hours a corrective theme appeared taken hold in global markets ahead of key risk events, including the mid-term elections in the US next Tuesday. And the FOMC decision on Nov 3rd. The scope of any Fed quantitative measures continued to be debated and scaled back from earlier scenarios. However, the USD saw the bulk of its Asian and early European gains dissipate into the NY morning.
- ECB 3-month LTRO tender results flatten the Eonia curve after dealers noted that the demand was 'quite large' at €42.5B with 132 bids. The German 2-year yield fell from 1.06% to 1.02% in the immediate aftermath of the result and this weighed on the EUR/USD to retest the 1.3800 level but the pair managed to regain its composure to retest 1.3840 area and little changed from its Asian opening level
- There were renewed rumors that
China might revalue the CNY currency. This seemed to stem from comment by PBoC adviser Li Daokui swho stated that the US and China already have the basis for an agreement to be settled at the G20 summit following constructive talks at the recent finance ministers meeting.

Geopolitical/ In the papers:
- The French pension reform bill passed the initial stages of voting, clearing the upper house (Senate). It now goes to the lower house, where it is again expected to pass. The president is expected to sign the bill into law during the first half of November.
- Credit rating firm Moody's commented on Italian banks, maintaining a negative outlook. The agency noted that it sees short-term profitability of banks and a difficult environment. The earnings will remain under pressure in coming quarters.
- Reported in the Telegraph, according some economists, rates will rise sooner than expected following the release of UK GDP data. Some in the market believe that the Bank of England could raise rates to at least 1% by the end of 2011. Prior to the release of the data, it was expected that rates would remain unchanged until the end of 2011. Note the current Bank of England rate is 0.5%.
- There were reports that the Irish government is seeking approval of spending cuts of approximately €15 billion over four years, bringing the
GDP-to-deficit ratio to 3%. The Irish Finance Minister later stated that no decision has been made on the amount of front loading of the budget adjustment will be needed next year.

***Looking Ahead ***
- (UK) Result of DMO syndicated sale of 2040 Gilt
- 6:00 (BR) Brazil Oct FGV Consumer Confidence: % v 121.7 prior
- 7:00 (US) MBA Mortgage Applications w/e Oct 22nd: No est v -10.5% prior
- (PD) Poland Central Bank Interest Rate Decision: Expected to maintain the Base Rate unchanged at the 3.50% level
- 8:00 (NO) Norway Central Bank (Norges) Interest Rate Decision: Expected to maintain the Deposit Rates unchanged at the current 2.00% level
- 8:30 (US) Sept Durable Goods Orders: +2.0%e v -1.5% prior (revised); Durables Ex Transportation: 0.5%e v 1.7% prior (revised)
- 9:00 (BE) Belgium Q3 Preliminary GDP Q/Q: No est v 0.9% prior; Y/Y: No est v 2.4% prior
- 9:00 (EU) EU's Ashton Speaks to Parliament Committee
- (GE) Germany Oct Preliminary Consumer Price Index M/M: 0.1%e v -0.1% prior; Y/Y: 1.3%e v 1.3% prior
- (GE) Germany Oct Preliminary CPI - EU Harmonized M/M: 0.1%e v -0.2% prior; Y/Y: 1.3%e v 1.3% prior
- 10:00 (MX) Mexico Aug Global Economic Indicator: 6.5%e v 5.1% prior
- 10:00 (MX) Mexico Sept Remittances: $1.9Be v 2.0B prior
- 10:00 (US) Sept New Home Sales: 300Ke v 288K prior
- 10:30 (US) Weekly DOE Energy Inventories: Crude: +1Me; Gasoline: 0.0E; Distillate: -1Me; Utilization: 82.8%e
- 13:00 (US) Treasury to s $35B in 5-Year Notes
- 16:00 (US) Fed's Dudley to Speak at University at Buffalo
- 16:00 (NZ) New Zealand Central Bank (RBNZ) Interest Rate Decision: Expected to maintain the Official Cash Rate unchanged at the current 3.00% level



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