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Friday November 12, 2010 - 11:01:57 GMT
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European Market Update: Rumors of an €80B Irish rescue package sooths the initial risk aversion flows (TTN)

Friday, November 12, 2010 5:51:34 AM

 European Market Update: Rumors of an €80B Irish rescue package sooths the initial risk aversion flows


***Economic Data***
- (RU) Russia Money Supply w/e Nov 8th (RUB): 5.30T v 5.22T
- (FR) France Q3 Preliminary Gross Domestic Product Q/Q: 0.4% v 0.5%e; Y/Y: 1.8% v 1.9%e
- (FI) Finland Sept GDP Indicator WD: 4.2% v 4.5% prior
- (FI) Finland Sept Final Retail Sales Volume Y/Y: 5.9% v 5.4% prelim
- (GE) Germany Q3 Preliminary GDP Q/Q: 0.7% v 0.8%e; Y/Y: 3.9% v 3.7%e;
GDP WDA Y/Y: 3.9% v 3.7%e
- (SP) Spain Oct Consumer Price Index M/M: 0.9% v 0.8%e; Y/Y: 2.3% v 2.2%e
- (SP) Spain Oct CPI EU Harmonized M/M: 0.9% v 0.8%e ; Y/Y: 2.3% v 2.2%e
- (SP) Spain Oct CPI Core M/M: 0.9% v 0.9%e; Y/Y:1.1% v 1.1%e
- (CZ) Czech Q3 Preliminary
GDP Q/Q: 1.1% v 0.6%e; Y/Y: 3.0% v 2.5%e
- (AS) Austria Q3 Preliminary GDP Q/Q: 0.9% v 0.9% prior; Y/Y: 2.0% v 1.9% prior
- (HU) Hungary Q3 Preliminary GDP Y/Y: 1.6% v 1.2%e
- (HU) Hungary Sept Final Industrial Output M/M: 0.5% v 0.5% prelim; Y/Y: 10.9% v 10.9% prelim
- (TU) Turkey Aug Unemployment Rate: 11.4% v 10.8%e
- (NV) Netherlands Q3 Preliminary GDP Q/Q: -0.1% v 0.5%e; Y/Y: 1.8% v 2.2% prior
- (NV) Netherlands Sept Retail Sales Y/Y: 2.9% v 0.6% prior
- (NV) Netherlands Sept Trade Balance: €4.6 v €2.7B prior
- (HK) Hong Kong Q3 GDP Q/Q: 0.7% v 0.6%e; Y/Y: 6.8% v 6.1%e
- (CZ) Czech Sept Current Account (CZK): -18.6B v -15.0Be
- (IT) Italy Q3 Preliminary
GDP Q/Q: 0.2% v 0.4%e; Y/Y: 1.0% v 1.2%e
- (EU) Euro Zone Q3 Preliminary GDP Q/Q: 0.4% v 0.5%e; Y/Y: 1.9% v 1.9%e
- (EU) Euro Zone Sept Industrial Production M/M: -0.9% v 0.2%; Y/Y: 5.2% v 7.1%
- (MA) Malaysia Central Bank maintained the Overnight Rate at 2.75%; as expected
- (GR) Greece Q3 Preliminary GDP Q/Q: -1.1% v -1.4%e; Y/Y: -4.5% v -4.3%e
- (PO) Portugal Q3 Preliminary GDP Q/Q: +0.4% v -0.1%e; Y/Y: 1.5% v 0.9%e

Fixed Income:
- (IT) Italy Debt Agency (Tesoro) sold total €7.92B vs. €8.25B Indicated in 2015, 2026 and 2034 Bonds
- Sold €4.5B in 3.0% Jun 2015 BTPs, avg yield 3.24% v 2.53% prior; Bid-to-cover: 1.41x v 1.37x prior
- Sold €2.25B in 4.5% Mar 2026 BTPs, avg yield 4.81%; Bid-to-cover: 1.3x (first tap of issue)
- Sold € 1.17Bin 5.00% Aug 2034 BTPs, avg yield 5.12% v 5.53% prior; Bid-to-cover: 1.72x v 1.51x prior
- (IN) India sold total INR110B in 2017, 2020 and 2040 bonds; as planned

- China interest rate rumors hits European stocks on the open; Shanghai Futures Exchange might take steps to curb speculative trading
- G20 Final Communiqustates its intention to avoid competitive currency devaluation but dealers view the rhetoric as "No Seoulation"
- European peripherals tighten in session aided by market chatter of a €80B Ireland rescue package circulating

Eurostoxx 50 at 2828 -0.1%, FTSE100 at 5816, unch; CAC40 at 3838, -0.7%, DAX at 6732, +0.1%

- European markets were in negative territory this morning on increased risk aversion as Irish debt woes continue to concern investors following rumors of a bailout from the IMF which both the IMF and Irish Finance Minister denied during the session. Rumors over a rate hike in
China also added to the risk aversion while G20 produced a litany of lackluster and unsubstantial statements which mirror the Finance Ministers summit communiqu a couple of weeks ago. The leaders, again, pledged to avoid competitive currency devaluation and to move towards market-defined currency exchange rates. However, due to tense bickering over exchange rates and global imbalances, G20 opted for a time-out and decided to discuss the details later next year. Bankers and commodity-related stocks are leading the decline.
- Among individual names, EADS [EAD.FR] reported its third quarter earnings, swinging to profit compared to last year's loss, while revenues came in line. Company also raised its FY10 EBIT and reaffirmed the FY10 revenue guidance. Due to the Qanats accident, company said that the A380 deliveries would be affected in 2011 that A350 production challenges remain. Shares opened lower by 2%.
- German steelmaker
Salzgitter [SZG.GE] reported a return to profit in the first 9-month and an increase in revenue but shares were pressured by the market trends and worries over China's potential rate hike.
- Much awaited was also Rolls Royce [RR.UK] interim statement which noted that the company would miss the 2010 profit. Company expected the underlying FY10 profit growth to be lower than prior guidance of 4-5% growth due to costs related to the Trent900 incident, but did not quantify those costs. Stock opened down by 3% but are now up by 3.9% and is the biggest gainer in the FTSE100.

- The G20 Final Communiquhighlighted that it should avoid competitive currency devaluation and enhance exchange rate flexibility.
US Pres Obama: G20 members have succeeded to return growth to global economy but must make more efforts more balanced. There remained a risk towards slipping back to old imbalances. Currency rates must reflect fundamentals and emerging markets must make the transition towards flexible exchange rates. G20 in broad agreement on the framework set out by the US and spelled out the key areas that need to be worked upon. On the US front the President pledged that the US must work on growth that translate into jobs and the country was prepared to make tough decisions on the deficit.
- US President Obama noted in hos post G20 Q&A that
China acknowledged the need to correct its imbalances but he added that change woiuld not come overnight . Obama reiterated that the CNY currency was undervalued and the issue was an 'irritant' to a lot of China's trade partners.
- IMF presented its observations after the G20 and noted that only limited progress was made at G20 towards external rebalancing. It reiterated it view that G20 nations must increase currency flexibility. It stated that Current Account balances were seen widening towards pre-crisis levels as only limited progress on structural reforms. G20 Advance members need a clear and credible deficit. It cautioned that G20 GDP estimates were distinctly optimistic compared to prior economic recoveries with some members budget plans are too optimistic under their
GDP scenarios
- Ireland PM Cowen commented in the Irish press that bond markets are behaving 'irrationally' as government's budget strategy remains on track,- Irish Independent newspaper. The international investors had misinterpreted recent comments by German Chancellor Angela Merkel
- IEA Nov Report stated that higher oil prices might threaten the economic recovery in 2011. It raised its 2010 oil demand by 190K to 2.34M bpd y/y but trimmed its 2011 outlook by 20K bpd to 1.19M bpd. The IEA maintained its 2010 Non-OPEC supply but raised its 2011 Non-OPEC supply by 250K to 53.4M bpd. It forecasted 2010 demand for OPEC crude by 400K to 29.6M bpd and raised the 2011 demand by 100K to 29.4M bpd

- Risk aversion sentiment was at its
high point as the European morning began with dealers on heightened alert that China PBoC might again raise its interest rates hikes. Rumors also swirled that China's exchanges could impose curbs on speculative trading in commodities. The continued peripheral situation was also a headwind on risk appetite. Market participants also tried to digests the G20 communiquand its positive/negative impact on the global growth front.
- On the surface the G20 communiquseemed highly satisfyingly and significant in pledging that emerging nations to move toward market-based FX rate determination, the monitoring of trade and current account imbalances and a new IMF-led crisis insurance system. The IMF noted after the formal release that G20 GDP estimates were distinctly optimistic compared to prior economic recoveries with some members budget plans being too optimistic under their
GDP scenarios.
- Nonetheless the Irish/Bund 10yr bond yield spread tightened during the course of the European morning off its record premiums set on Thursday. There was vague market chatter of a €80B
Ireland rescue package circulating just ahead of the NY morning and the worst effect of the session's risk aversion was nullified. EUR/USD was retesting above the 1.37 handle after probing 1.3575 early today. USD/JPY held above its hourly support of 81.50 and drifted back above the 82 handle.

Geopolitical/In the papers:
- The Wall Street Journal noted that Germany's proposal for bondholders to take losses in future sovereign bailouts led to higher EU borrowing costs. According to the article, investors now believe that default risks are higher as the German proposal has spooked some investors.
- The EU began discussing 2011 budget increases with 12 European governments, including the
UK, France and Germany, supporting the 2011 EU budget increase of 2.9% against the EU parliament vote in favor of a 6% increase. Note, if a consensus is not reached before December, then the budget will remain at 2010 levels. The 2011 draft budget, as set by the EU Commission, totals €130 billion.
- The 'Heard on the Street' section of the Wall Street Journal suggested a bailout for Ireland appears 'increasingly necessary'. The government forecast of 2.75% GDP over the next two years at 1.25% inflation suggests an interest costs above 4% would strain fiscal sustainability. It suggests Ireland to approach the IMF for cheapest loan option, though warns evading EU support mechanism would be a blow to union prestige.

***Looking Ahead ***
- (CO) Colombia Monetary Policy Minutes
- 6:00 (BR) Brazil Sept Retail Sales M/M: 0.0%e v 2.0% prior; Y/Y: 11.1%e v 10.4% prior
- 8:35 (US) Fed's Tarullo Speaks on Financial Reform in Washington
- 9:55 (US) Nov Preliminary University of Michigan Confidence: 69.0e v 67.7 prior
- 13:00 (AR) Argentina Oct Wholesale Price Index M/M: No est v 0.9% prior; Y/Y: No est v 15.1% prior
- 14:00 (AR) Argentina Oct Consumer Price Index M/M: No est v 0.7% prior; Y/Y: No est v 11.1% prior
- 14:00 (EU) ECB's Gonzalez-Paramo Speaks in Lugo, Spain
- 16:00 (CO) Colombia Sept Trade Balance: No est v -$111.6M prior
- 16:35 (US) Fed's Raskin Speaks on Mortgage Servicing in Boston
-Weekend (JP) APEC Leader Summit



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