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Thursday October 28, 2010 - 10:11:49 GMT
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European Market Update: Peripheral yields continue to rise (TTN)

Thursday, October 28, 2010 5:55:39 AM

 European Market Update: Peripheral yields continue to rise


***Economic Data***
- (FI) Finland Sept Preliminary Retail Sales Volume Y/Y: 5.8% v 5.6% prior
- (UK) Oct Nationwide House prices M/M: -0.7% v -0.3%e; Y/Y: 1.4% v 2.3%e
- (IN) India Primary Articles WPI w.e Oct 16th Y/16.6% v 18.1% prior; Food Articles WPI Y/Y: 13.8% v 15.5% prior
- (FR) France Sept Producer Prices M/M: 0.3% v 0.2%e; Y/Y: 4.2% v 4.0%e
- (HU) Hungary Sept Unemployment Rate: 10.9% v 11.1%e
- (SW) Sweden Oct Consumer Confidence: 23.4 v 28.0e; Economic Tendency: 110.4 v 113.0e
- (SW) Sweden Q3 Manufacturing Confidence: 5 v 10e
- (SP) Spain Aug Total Housing Permits M/M: -40.0% v -12.4% prior; Y/Y: 2.9% v -19.3% prior
- (DE) Denmark Sept Unemployment Rate: 4.2% v 4.1%e
- (SW) Sweden Sept Retail Sales M/M: 0.8% v 0.5%e; Y/Y: 5.5% v 4.2%
- (IT) Italy Sept Hourly Wages M/M: 0.3% v 0.0% prior; Y/Y: 1.7% v 2.2% prior
- (EU) Euro Zone Oct Business Climate: 0.98 v 0.79e; Consumer Confidence: -11 v -11e; Economic Confidence: 104.1 v 103.5e; Industrial Confidence: v -1e; Services Confidence: v 7e
- (BE) Belgium Oct CPI M/M: 0.1% v 0.3% prior; Y/Y: 3.0% v 2.9% prior
- (SA) South Africa Sept PPI M/M: -4.1% v -2.9%e; Y/Y: 6.8% v 8.2%e
- (RU) Russia Gold & Forex Reserve w/e Oct 22nd: $498.7B v $503.7B prior

Fixed Income:
- (IT) Italy Debt Agency (Tesoro) sold €7.25B vs. €6.25-7.25B in 2013 and 2021 Bonds
- Sold €4.0B in Jun 2.25% 2013 BTPs; avg yield 2.32% v 2.21% prior; Bid-to-cover: 1.34x v 1.52x prior
- (HU) Hungary Debt Agency sold HUF55B in 12-month Bills; Avg Yield 5.82% v 5.72% prior

- Fed asks dealers to estimate impact of debt purchases.
- BoJ provides details to previously announced ¥5T asset purchase scheme.
- BoJ cut its 2010 economic growth forecast for the current fiscal year to 2.1% from 2.6% prior; Slow exit from deflation
- US Republicans plan budget cuts win the House and Senate


European indexes as of 05:47 FTSE100 at 5685, +1.0% at 5,707, CAC40 +0.9% at 3850; DAX +0.9% at 662; Eurostoxx50 +0.9% at 2,854

- European shares opened in positive territory today boosted by a stream of positive corporate earnings.
Tech stocks were lifted by French name Dassault Systems [DSY.FR] which soared to almost 8% after lifting its FY10 revenue, EPS and operating margin guidance. Net came in softer than expectations but revenues surpassed them. Oil companies were also among the gainers after Royal Dutch Shell [RDSA.UK] after reporting an 18% increase in earnings which exceeded expectations. The jump was largely due to higher oil and LNG prices. Oil production had also increased on a yearly basis. Also Italian name Eni [ENI.IT] beat estimates and reiterated its FY10 guidance. Both shares are trading higher.
- In pharma names Astrazeneca [AZN.UK ] fell about 2% after reporting a decrease of 27% in profit due to generic competition. On the other hand, Sanofi [SAN.FR] reported slightly higher earnings and revenues and raised its EPS guidance at flat to up 2% from flat to down 4%. Company reiterated that its offer for Genzyme will remain at $69/shr.
Bayer [BAYN.GE] also rose during the session after reporting a higher profit which exceeded expectations. Results were boosted by the recovery in plastics business. Company reiterated its FY10 forecast and remained positive for the remainder of the year. France Telecom [FTE.FR] gained about 2% after a positive earnings report where the company also reiterated its guidance for FY10.
- Among the losers were MAN and Santander. Despite beating analysts estimates, MAN SE [MAN.GE], order intake was flat over the quarter and, in camouflaged language, MAN seemed to lower slightly its FY10 revenue guidance. In mid-September company had raised the revenue target to €15B and today announced that it expected a revenue growth of above 20% implying above €14.4B. Shares lost about 2.7%. Santander [SAN.SP] fell less than 1% after company announced it would miss a previous June forecast where it was expecting to report a similar profit in 2010 to last year's of €8.94B. Furthemore, provisions had increased as well as bad loans ratio.

- BoJ Shirakawa commented in the post-rarte decision press conference that the central bank might expand the ¥5T new asset purchases if economy worsened. The BOJ would examine merits and side-effects of the measures. The BOJ policy easing measures likely have improved sentiment but cautioned the Japanese recovery might slow due to JPY currency appreciation. Advanced nations monetary easing might posed risk of overheating in emerging markets. He noted that allowing higher fx rate could avoid bubbles in the emerging markets and added that the lack of FX flexibility could hurt them. He did note that capital control in general were undesirable.
- ECB Weber commented that global imbalances remained a risk for the economy and that market-oriented FX contributed towards stability. China's FX reserves made the global economy more vulnerable but he did welcome recent appreciation in CNY. Corrections in imbalances were largely up to national gov't but a more flexible CNY currency would help China strengthen its domestic demand. He reiterated that any additional economic stimulus
- ECB member Stark reiterated that financial crisis is not yet over and that the crisis would continue to impact both real and potential growth. He noted that growth levels prior to 2007 were not sustainable and that the Euro Zone would need 20 years to lower its debt levels back towards 2007 level. Debt problems are bigger concerns for US and Japan. He warned that public debts were crowding out future investment and could not assume that debt service costs would not rise as higher debt levels would lead to higher interest rates.
- ECB Q3 Bank Lending Survey noted that the balance of banks tightening standards stood at 4% compared to 11% q/q. Thus the proportion of banks reporting an increased demand for loans exceeded the proportion reporting a smaller demand. The improvement in net demand for loans was similar in range for large firms and SMEs. The Q3 net demand for business loans Q/Q: +7% v -2% prior. EMU demand for consumer credit declined in Q3 vs. Q2 but did expect better demand in Q4. Banks expected lending standards to be as tight in Q4 compared to Q3. EMU bank had better access to funds in Q3 and saw better wholesale funding access in Q4 and that banks see conditions for company loans stable in Q4 vs. Q3
- China PBoC Advisor Zhou Qiren commented that the China FX policy was an obstacle to more outbound investment as overseas investments would help balance the Chinese economy. Expediting economic restructuring would lead to fast growth for China in the next five years
- China State Administration of Foreign Exchange (SAFE) stated that it found irregularities in some fx businesses in Chinese banks and added that it discovered 197 cases for the period Feb to Oct, which involved more than $7B. the regulator reiterated that it would strengthen oversight of bank's fx services.
- China Vice Minister official stated that he was confident that Portuguese measures would help its economy and finances return to normal
- EU Summit Draft urged that it was against currency moves for competitive reasons and was against all forms of protectionism
- World Bank Zolleck: Progress on specific G20 current account to GDP target will be difficult
- ECB's Draghi: Monetary and fiscal policies are not moving in tandem; Need global coordination

The USD remained a touch softer during the European morning but remains within the ranges established on Wednesday. Dealers noted that there was a rise in risk sentiment attributed to the results of corporate earnings. The ECB Q3 Bank Lending Survey pointed towards improved conditions in Q3 but credit standards were expected to be tightened in Q4. EUR/USD trading at 1.3830 heading into the NY morning with some continued headwinds stemming from continued widening in euro zone peripheral spreads. The EU Summit being held today was also a possible factor to see if any changes are suggested to the Maastricht Stability Pact. The USD/JPY remained unable to break above the 82 level and was at 81.33. The BoJ slightly lowered its economic forecast and predicted a slow exit from deflation. The GBP/USD managed to shake off the disappointing nationwide house price data to regain a hold above the 1.58 handle.

Geopolitical/ In the papers:
- Following yesterday's failed budget negotiations between the Portuguese government and the Opposition party, Portugal's Finance Minister dos Santos stated the government is still willing to hold further discussions to pass the 2011 budget proposal. The local press reported that the minority government needs the support, or at least an abstention, of the Social Democratic Party (PSD) to pass net year's budget. Note the negotiation s broke off yesterday citing differences over taxes and cuts to spending. A representative for the Social Democrats yesterday said the party will declare it intentions prior to the parliamentary vote on 2nd/3rd of November.
- In the Irish Times, Ireland's Prime Minister Cowen said that the budget for next year will focus more on spending cuts instead of taxes. Last night Irish Central Bank governor Honohan stated the deterioration in the public finances had been "worse than almost any other country.

***Looking Ahead ***
- (PO) Portugal Oct Consumer Confidence: No est v -37.4 prior; Economic Climate: No est v 0.1 prior
- 6:00 (PD) Poland's Treasury Minister Grad
- 6:00 (RU) Russia to sell up to RUB30B in OFZ Bonds
- 6:00 (UK) Oct CBI Distributed Sales: No est v 49 prior
- 6:00 (BR) Brazil Oct FGV Inflation IGP-M M/M: 1.0%e v 1.2% prior; Y/Y: No est v 7.8% prior
- 6:30 (BR) Brazil Central Bank (COPOM) Monetary Policy Meeting Minutes
- 8:00 (CL) Chile Sept Industrial Production Y/Y: 6.1%e v 6.9% prior; Industrial Sales Y/Y: 1.7%e v -0.2% prior
- 8:00 (CL) Chile Sept Total Copper Production: No est v 467.7K prior
- 8:30 (US) Initial Jobless Claims: 453Ke v 452K prior; Continuing Claims: No est v 4.441M prior
- 11:00 (US) Fed to Purchases Notes/Bonds
- 13:00 (US) Treasury to sell $29B in 7-Year Notes
- 15:00 (AR) Argentina Sept Supermarket Sales Y/Y: No est v 18.2% prior
- (CH) China Sept Leading Index: No est v 101.91 prior



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