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Tuesday November 2, 2010 - 09:57:22 GMT
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European Market Update: Risk appetite sandwiched interest rate hikse and better European PMI Manufacturing data (TTN)

Tuesday, November 02, 2010 5:52:45 AM

 European Market Update: Risk appetite sandwiched interest rate hikse and better European PMI Manufacturing data


***Economic Data***
- (IN) India Central Bank (RBI) raised both the Repo and Reverse Repo Rates by 25bps each to 6.25 and 5.25% respectively; As expected.

- (IR) Ireland Oct NCB Manufacturing PMI: 50.9 v 48.4 prior
- (HU) Hungary Oct PMI: 51.7 v 50.2 prior
- (PD) Poland Oct Manufacturing PMI: 55.6 v 54.7 prior
- (HU) Hungary Aug Final Trade Balance: €392.0M v €392.0M prelim
- (SP) Spain Oct Manufacturing PMI: 50.6 v 49.6 prior; Employment Index: 50.6 v 47.8 prior (First rise in employment subcomponent in over three-years (38 months)
- (IT) Italy Oct PMI Manufacturing: 53.0 v 52.8e
- (FR) France Oct Final PMI Manufacturing: 55.2 v 55.2e
- (GE) Germany Oct Final PMI Manufacturing: 56.6 v 56.1e
- (EU) Oct Final PMI Manufacturing: 54.6 v 54.1e
- (GR) Greece Oct Manufacturing PMI: 43.6 v 44.7 prior
- (UK) Oct PMI Construction: 51.6 v 53.0e; lowest reading in 8 months

Fixed Income:
(SA) South Africa Bond Auction Results: Sold total ZAR2.1B vs. ZAR2.1B Indicated in R186 and R208 Bonds
- Sold ZAR800M in R186 2026 Bonds; Clearing yield 8.02%; bid-to-cover: 2.27x
- Sold ZAR1.3B in R186 2021 Bonds; Clearing yield 7.92%; bid-to-cover: 3.26x

- Australia RBA ends pause and hikes by 25bps to 4.75% (Not expected)
- India Central Bank (RBI) raised both the Repo and Reverse Repo Rates by 25bps each to 6.25 and 5.25% respectively; as expected.
Japan Econ Min Kaieda: Yen has been moving due to Fed QE speculation; Unclear if the yen appreciation trend will slow down
US cleans house today. (Pun intended)


Eurostoxx at 2844, +0.26%, FTSE100 at 5737, at +0.76%, CAC40 at 3852, +0.29%, DAX at 6624, +0.30%

- European stocks are mixed during the session as Wall Street closed almost flat and as risk sentiment was initially dominated by the RBA and RBI interest rate hikes which curb some risk appetite. Stocks were moving into positive territory as better European data helped to sooth the rate hike effects. However, Investors remain cautious ahead of tomorrow's Fed meeting on potential QE2 and today's mid-term elections. There were highly anticipated names such as BP, BG and Lloyds reporting out of
UK but the movement in the shares was practically flat.
- BP [BP.UK] was a positive surprise for the markets as net income for Q3 was higher than expected and revenues were in line with expectations. BP swung to profit after reporting a record loss of $32B in the first half due to GoM spill charges. The positive results follow the trend of its peers such as Eni, RDS, Exxon which all reported better than expected results. However, the cost of the spill had increased by $7.7B to $39B during the quarter. The cost increase was a bit of a negative surprise to the markets although some analysts think it may be a case of extra prudence. Production was down slightly but the refining margins had improved on a yearly basis helped by higher oil and gas prices. BP reiterated that it will review its dividend policy when it reports Q4 results early next year, but the management did not provide any indication of the amount of dividend reinstatement. BG Group [BG.UK] exceeded expectations on both net earnings and revenues while production volumes had slightly increased on a yearly basis. Company also increased its CA
PEX guidance and its estimate for energy resources offshore Brazil. Shares were higher by 1.5%. Lloyds [LLOY.UK] update was frustratingly vague and qualitative. Most of the UK banks had a tradition of reporting Q3 results without providing numbers but following the credit crunch, Barclays and HSBC started to mimic US and EU lenders and provided numbers to their results. Bank noted that impairments had declined and that it remained on track to deliver lower impairments.Bank said that it continued to expect a modest improvement in the banking net interest margin in the second half of 201.
Germany's largest retailer [MEO.GE] beat expectations and raised its FY10 EBIT outlook thanks to a sales recovery in Eastern Europe, which together with Asia show the highest economic potential. Company maintained its revenue guidance. Shares fell 5%. Industrial name Linde [LIN.GE] reported an increasing net profit which also beat estimates. Company reiterated its FY10 guidance of operating profit clearly over 2008 record levels. Shares are trading down about 1.6%

- Germany Finance Ministry releases tax draft for the 2010-12 period which forecasted an additional €62.5B in revenues
- Poland Central Bank's Chojna-Duch commented that the central bank might raise interest rates due to sustained higher CPI
- Fitch: China will need to use policy more aggressively if the Fed reserve continues to ease
- Former BoE member commented on the upcoming BOE interest rate decision with mixed outlooks. Former BOE member Lomax noted that a fiscal squeeze to take demand from the economy
UK but would not vote for higher rates or further QE. Former BOE MPC member Gieve echoed that sentiment and stated that he would vote for no change in interest rate or QE measures. However former BOE MPC member Julius commented that she would raise UK rates by 25bps to 0.75%

The USD remained locked within recent ranges ahead of the FOMC decision (due on Wednesday) but on a softer footing in the session. Dealers remained mindful of the pitfalls of a liquidity trap. The greenback retreated from its best levels achieved on Monday on views echoed by Pimco's that the dollar could lose 20% over the next few years if the Fed continued its path of unconventional easing. The European PMI Manufacturing data series provided another constructive tone towards risk appetite and this also weighed upon the USD sentiment in the session. Spain Manufacturing PMI sub-Index of employment managed to move back above the 50 level for the first time in over three years. EUR/USD edging backs towards the 1.40 neighborhood.
On the peripheral front, the Irish/German 10-yr Gov't bond premium continued to widen towards fresh record levels; currently above 470bps area as concerns start to mount over the Dec 7th Irish budget.

Geopolitical/ In the papers:
- The Guardian commented on the recent move in the Irish ten year bond yield to a record high. As noted in the article, part of the increase was related to concerns among investors that
Ireland may not be able to pass its austerity measures, and the outlook for its growth. According to Colin McCarthy, a economic advisor for the government, at the weekend he believed that if the budget planned for next month does not do enough to convince financial markets, Ireland will be unable to finance itself and will be forced to be bailed out by the IMF.
- The Telegraph's Evans-Pritchard noted the Fed's 'QE2' has the risk of accelerating the decline in the dollar-based currency system. He stated that if the US dollar based currency system were to break down it could lead to a system based on the euro and yuan, a hybrid gold standard or a multi-metal 'bancor'.

***Looking Ahead ***
- (SP) Spain Oct Net Unemployment M/M: K v 82.8Ke v 48.1K prior
- (RO) Romania Central Bank Interest Rate Decision: Expected to maintain rates at 6.25%
- 6:00 (AS) Austria's Financing Agency Announced Bond Auction Volume
- 6:00 (SA) South Africa Oct Naamsa Vehicle Sales Y/Y: 22.2% v 16.6% prior
- 6:05 (SA) South Africa to sell up to ZAR2.1B in R186 and R208 Bonds
- 6:15 (EU) ECB Announces 7-Day Tender Allotment
- 6:30 (HU) Hungary to sell 3-Month Bills
- 6:30 (BE) Belgium Debt Agency to sell Bills
- 6:30 (UK) DMO to sell £4.0B in 2% 2016 Gilts
- 6:45 (TU) Turkey to sell 2013 Fixed Rate Bond and 2020 4% CPI-Linked Bond
- 7:00 (FI) Finland to Sell upt o €1.5 in 3.375% 2020 and 4% 2025 Bonds
- 7:45 (US) ICSC Weekly Chain Store sales
- 8:30 (SI) Singapore Oct Purchasing Managers Index: 49.3e v 49.5 prior; Electronics Sector Index: 48.2e v 48.5 prior
- 8:55 (US) Weekly Redbook Retail Sales
- 10:00 (FR) France Debt Agency (ATF) to sell € in 13-week, 20-week, 24-week and 50-week Bills
- 13:00 (IT) Italy Oct New Car Registrations Y/Y: No est v -18.9% prior
- 15:00 (IT) Italy Oct Budget Balance: No est v -€ 12.7B prior; Budget Balance YTD: No est v -€64.5B prior
- 16:30 (US) API Weekly Energy Inventories
- 17:00 (US) ABC Consumer Confidence w/e Oct 31st: No est v -47 prior
- 20:01 (UK) Oct BRC Shop Price Index
- 21:00 (CH) China Oct Non-manufacturing PMI: No est v 61.7 prior


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