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Thursday November 4, 2010 - 10:19:31 GMT
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European Market Update: QE2 sets sail with open bar to short USDs (TTN)

Thursday, November 04, 2010 5:57:01 AM

 European Market Update: QE2 sets sail with open bar to short USDs


***Economic Data***
- (IN) India Primary Articles WPI w/e Oct 23rd Y/Y: 15.4% v 16.6% prior; Food Articles WPI Y/Y: 12.9% v 13.8% prior
- (IR) Ireland Oct NCB Services PMI: 50.9 v 48.8 prior
- (BR) Brazil Oct FIPE CPI: 1.0% v 1.0%e
- (UK) Oct Halifax House Prices M/M: 1.8% v 0.6%e; 3M/Y: 1.2% v 0.8%e
- (SZ) Swiss Oct Foreign Currency Reserves: 211.9B v 215.3B prior
- (SP) Spain Oct Services PMI: 46.5 v 47.9 prior; Lowest reading since Dec 2009
- (SZ) Swiss Oct CPI M/M: 0.5% v 0.6%e; Y/Y: 0.2% v 0.3%e
- (NV) Netherlands Oct
CPI M/M: 0.1% v 0.6% prior; Y/Y: 1.6% v 1.6%e
- (NV) Netherlands Oct
CPI EU Harmonized M/M: 0.2% v 0.7% prior; Y/Y: 1.4% v 1.4% prior
- (IT) Italy Oct PMI Services: 51.0 v 51.1e; Lowest reading in three months
- (FR) France Oct Final PMI Services: 54.8 v 55.3e; lowest reading in 7 months
- (GE) Germany Oct Final PMI Services: 56.0 v 56.6e
- (EU) Euro Zone Oct Final PMI Services: 53.3 v 53.2e; PMI Composite: 53.8 v 53.4e
- (UK) Oct New Car Registrations Y/Y: -22.2% v -8.9% prior

Fixed Income:-
(SP) Spain Debt Agency (Tesoro) sold €3.39B in new 3.25% 2016 Bonds; avg yield 3.575% v 2.964% prior; Bid-to-cover: 1.6x v 1.6x prior

QE2 sets sail with open bar to short USD
Monster online employment index falls by 2 points MoM to 136

EuroStoxx at 2884, +1.9%, FTSE100 at 5850, +1.8%, CAC40 at 3916, +1.9%, DAX at 6,710, +1.4%

- European shares reached highest levels since April after Fed's announcement of $600B of QE2. Miners also rallied after BHP [BHP.AU] gained about 4.5% following Canadian's govt rejection of its $39B bid for Potash. Banks were sustained by
BNP Paribas [BNP.FR] which was trading higher by 3% following its third quarter results. After exceeding expectations bank said that it would not need to raise capital following Basel III, comments in line with its home rival Societe Generale. Investment bank revenue had increased over the quarter but decreased on a yearly basis. Bank said that the Basel III requirements would increase risk-weighted assets by 40B; an impact deemed significant but manageable. Moreover, BNP expressed confidence in the next quarter without further detailing it.
- The Dutch consumer goods Unilever [UNA.NV ] rallied about 3.5% after beating expectations and reporting a growth in underlying sales and volumes. However, company reported lower gross margins as a result of increased commodity costs.
Deutsche Telekom [DTE.GE] fell about 1.6% as net beat expectations but revenues came in softer than expected and had decreased on a yearly basis. Company reaffirmed its forecast as mobile business in
Germany, its main market, continues to be strong. Heidelberg Cement [HEI.GE] rallied about 6% following its positive results. Company did not give a specific outlook for 2010 but said that it expected sales and earnings to rise. Company noted that demand for building materials in the US was still uncertain. Adidas [ADS.GE] rose in early trading after beating estimates on China's growth and raising its FY10 revenue outlook. Furthermore, Adidas predicted an increase in revenues and net income in 2011.
- The two main Swiss insurers reported today. Swiss Re [RUKN.SZ] was up 6.2% after beating expectations, noting a low catastrophe payout. Company also said it would repay the loan it owes to Buffet's Berkshire Hathaway earlier. Meanwhile, Zurich Financials [ZURN.SZ] disappointed on its results as net and revenues came in lower than expected. Net had suffered a one-time charge related to a
US lawsuit.
- Out of the
UK, consumer discretionary names such as William Morrisson [MRW.UK] and JD Wetherspoon [JDW.UK] both provided a trading update. William Morrisson reported a slight increase in like-for-like sales which beat estimates but expected the Christmas to be very tough due to subdued consumer spending. JD Wetherspoon reiterated that higher interest charges, following refinancing in March 2010, would adversely affect profits in the first half of the financial year . Both shares are trading in the red. Man Group [EMG.UK] reported a net in line with estimates which also beat company's own prior guidance. AUM's also rose to $40.5B. Company was the biggest winner gaining almost 8% in London trading.

- The Chinese were quite vocal in the aftermath of the Fed's QE2 program. China PBoC advisor Xia Bi commented that the
US printing of money was the biggest risk to the global economy. He noted that as long as there was no restraint in issuing global currencies it raised another possible occurrence of a crisis
China PBoC advisor Li Daokui commented that the Fed's launch of QE2 measures would add the pressure on CNY appreciation . He added that results from US mid-term elections should mitigate political pressure on yuan currency. He earlier commented that China's monetary policy stance should be shifted to "prudent' from 'moderately loose'. He added that China should seek plan to stabilize major currencies
- China PBoC Research Chief Zhang commented that China was facing increasing pressure on prices and that CPI to remain high in the short time. The Fed's QE2 measures would contribute to
China's problem on inflation. The Fed's special measures will impact the global economy and asset prices. He added that China had 'no problem with 2010 GDP growth of 10%.
Japan vice fin Min Sakurai: Reiterates that currency volatility is not desirable. He added that he was not in the position to determine the impact from Fed's QE measures on the FX market
- IMF chief economist Blanchard: Recent Fed announcements not the end of the world if it causes some inflation. He added that he expected the
US economy to rebound and forecasts global GDP growth between 3% to 4% for both 2010 and 2011 periods. He believed G20 can find solution to 'currency wars'.
- S&P:
Japan's ageing population could undermine the country's sovereign rating in the long run. The ageing society would increase govt spending in the absence of structural change.
- APEC Fin Min Draft Doc noted the need for policies to reduce excessive economic imbalances and highlighted the uncertainty in global economy. The draft suggested that advanced surplus countries address and increase domestic demand while countries with high debts should make fiscal management more efficient
UK's chancellor Osborne commented that a robust fiscal policy gave more flexibility towards monetary policy

Dealers eagerly waived to the departing QE2 as the Fed measures set sail with open bar to short USD. Dealer note that post Fed the 1.4060 provided the obvious support in EUR/USD and set their sights set on testing the KEY downtrend line of 1.4500 (drawn from the July 2008 all-time high of 1.6030). EUR/USD entered the NY morning in the mid-1.42 handle. Both the EUR and GBP hit their highest level since January as a result ofd the QE2 measures. The commodity-related pairs exhibited strong undertones as crude posted its best close since May over the $85/contract. The AUD/USD hit fresh 28-year highs at 1.0087 and USD/CAD made another stab towards parity.
- USD/CNY: Fed's central bank inflation policy or QE2 will again lead to exporting dollars to non-dollar countries thus keeping commodities inflation cycle well alive around the world. Many Non-Dollar countries are likely to resort to capital control measures to fend off the flood of dollars. Analysts believe that
China is likely to speed up bilateral currency trade pact with all trading partners to avoid flood of dollars or use of dollars in its real goods trading in the end.
- Overall it is their belief that any CNY revaluation of anything of significance against Dollar is out of question too for foreseeable future.

Geopolitical/In the papers:
- During yesterday's session, the Portuguese Parliament approved the general guidelines for the 2011 austerity budget. The measures will include raising VAT and public spending cuts. There will be discussions over the details to the budget in coming weeks. A final vote will occur by the end of November, though it is currently scheduled for Friday the 26th.
- The Financial Times commented on the significance of the local elections in
Greece this weekend. According to Prime Minister Papandreou, the elections are a 'referendum' on the €110 billion EU/IMF bailout at a cost of austerity. He also promises to call general elections if the ruling PASOK does not win 13 key regional governor posts. He adds that the country is at risk if the opposition view is adopted and the reform program is rolled back.
- According to IMF staff report of economists, the Basel III requirements may shift business to more lightly regulated sectors. The Wall Street Journal article further notes that European banks would be most affected, in part reflecting greater reliance on wholesale funding and high loan-to-deposit ratios.

***Looking Ahead ***
- 6:00 (FR) France Debt Agency (ATF) to sell bonds
- 6:30 (HU) Hungary to sell Bonds
- 7:00 (CZ) Czech Republic to sell CZK35B in 364-Day Bills
- 7:00 (BR) Brazil Sept Industrial Production M/M: +0.1%e v -0.1% prior; Y/Y: 7.1%e v 8.9% prior
- 8:00 (BR) Brazil Sept CNI Capacity Utilization: 82.4%e v 82.3% prior
- 8:00 (CZ) Czech Central Bank Interest Rate Decision: Expected to maintain the Repo Rate unchanged at the current 0.75% level
- 8:00 BOE Interest Rate Decision: Expected to maintain bot the Interest Rate and Asset Purchase Target (APT) at the current levels of 0.50% and £200B respectively

- 8:30 (US) Q3 Preliminary Nonfarm Productivity: 1.0%e v -1.8% prior; Unit Labor Costs: 0.6%e v 1.1% prior
- 8:30 (US) Initial Jobless Claims: 442Ke v 434K prior; Continuing Claims: 4.378Me v 4.356M prior
- 8:45 (EU) ECB Interest Rate Decision: Expected to maintain the Main Refi Rate unchanged at the current 1.00% level
- 9:30 (EU) ECB's Monthly News Conference
- 10:00 (CA) Canada Oct Ivey Purchasing Managers Index: 65.0e v 70.3 prior
- 10:30 (US) Weekly EIA Natural Gas Inventories
- 10:30 (US) Oct ICSC Chain Store Sales Y/Y: No est v 2.6% prior
- 11:00 (US) Fed to Purchases Notes/Bonds
- 13:00 (SZ) SNB's Danthine Speaks in Geneva
- 13:00 (US) Treasury to sell 10-Year TIPS Reopening
- 17:00 (CO) Colombia Oct Producer Price Index M/M: No est v -0.6% prior; Y/Y: No est v 2.3% prior
- 20:30 (AU) RBA Quarterly Monetary Policy Statement



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