European Market Update: Germany continues to preach its view on bailouts (TTN)
Monday, November 22, 2010
European Market Update: Germany continues to preach its view on bailouts
***Economic Data*** - (JP) Japan Convenience Store Sales Y/Y: -5.9 v 12.9% prior - (SA) South Africa Sept Leading Indicator: 131.9 v 130.8 prior - (SZ) Swiss Oct M3 Money Supply Y/Y: 6.1% v 6.7% prior - (TT) Taiwan Oct Unemployment Rate: 5.0% v 5.0%e - (DE) Denmark Nov Consumer Confidence: 3.6 v 1.3e - (HK) Hong Kong Oct CPI Composite Y/Y: % v 2.4%e - (IC) Iceland Oct Wage Index M/M: 0.3% v 0.3% prior; Y/Y: 6.0% v 6.0% prior - (MA) Malaysia Q3 GDP Y/Y: 5.3% v 5.6%e v 8.9% prior
Fixed income: - (GE) Germany sold â‚¬2.9B in 12-Month BuBills; avg yield 0.8721% v 0.8521%; Bid-to-cover:3.3 x v 1.8x prior - Slovakia Debt Agency (ARDAL): Rejected all bids in 4.5% 16-year bond auction citing yields would have been too high
*** SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM ** Notes/Observations: - Ireland to formally request aid from EU with â‚¬80-90B package seen; Germans continue to express their hawkish view on terms - S&P lowers its outlook on New Zealand but affirms sovereign rate at "AA+"
Eurostoxx50 at 2853, +0.26%, FTSE100 at 5757, +0.44%, CAC40 at 3872, +0.32%, DAX at 6878, +0.49%
- European shares opened in positive territory following Ireland's official demand for the rescue package for the sake of financial stability. With risk back on, Irish and EU banks were higher in the session welcoming the news. However, the rally seems to be more the result of short-term relief and shares are heading lower, albeit still in positive territory, as the details of the aid, such as the conditions and the amount are not precise yet. Furthermore, Portugal is closely eyed by investors and may be the next country to yield to markets' ceaseless pressure, despite statements from both the EU and Portugal underlining that the situation in Portugal was different than Ireland. - In individual names, British companies dominated the news flow. Outsourcing company Mitie [MTO.UK] opened higher by 7.5% following its H1 trading update. Both operating profit and revenues had increased and the company also raised its interim dividend, while expecting strong growth in the second half of the financial year. Rolls Royce was trading higher by 1.4% after being awarded a $1.8B engine contract from Air China. British retailer, Tesco [TSCO.UK] was among the best performers in the blue-chip retailers after rallying 1.3% following its Asian sales report. Company reported a growth in sales in most of its Asian markets, especially in China and South Korea (respectively, +8.3% and +6.7%) - Danish wind turbine manufacturer Vestas [VWS.DE] was also trading higher by more than 1% following accounting changes and its revenue guidance for 2010 and 2011. In M&A news Prysmian[PRY.IT] traded lower y 3% after launching a â‚¬17.20 recommended offer for Draka.
Speakers: - German Finance Ministry published its October Monthly report. It noted that its Oct YTD Federal & State Tax Revenues were â‚¬385.6B and unchanged from year-ago levels. It stated that it expected federal and state tax revenue to remain flat for all of 2010 at â‚¬484.9 B. The MOF expected Germany's economic recovery to continue but GDP pace to moderate markedly from H1 with CPI to remain moderate but price pressures to increase with recovery. Germany's 2010 deficit to be the highest on record around â‚¬50B versus â‚¬40B hit in 1996 despite success of its fiscal consolidation. In the long run, only a reduction in the debt ratio can lead to higher economic growth - Ireland Fin Min Lenihan commented that the EU and the IMF were generally satisfied with Ireland's 4-year budget outlook budget plan and unlikely ask for changes to the budget plan (likely to be published on Nov24th). Ireland would NOT necessarily be out of the bond markets for three years. The minister again stressed that Irish Deposits were 'utterly safe' and that Ireland has 'substantial cash reserves'. There was no pressure for Ireland to raises it Corporate tax rate from 12.5% with assurances that the issue is a domestic one. On the country's banking sector he stated that M&A could not be ruled out. - Ireland opposition party Noonan (Fine Gael) commented that the country would be out of bond markets for around three years after bailout package. He stressed that Ireland 12.5% Corp Tax rate was 'safe' but Irish banks would need more capital. He commented that he believed that there may be conflict of policy between IMF and the ECB on Ireland bailout. In clarifying he stated that IMF would be following the type of American model where those that lend recklessly should be punished as well as those who borrow recklessly - UK Chancellor Osborne confirmed UK would contribute about Â£7B in Irish aid - EU's Monetary & Affairs Commissioner Rehn commented that global action was required to prevent another economic crisis as imbalances are starting to widen again. He noted that FX competition is the greatest threat to global recovery. Downside risks to EU recovery were substantial but gradual recovery lied ahead. On Ireland the commissioner stated that technical discussions with Ireland could be concluded by end of Nov and it was too soon to determine the amount of the bailout. He reiterated the view that Portugal's situation differed from Ireland. Ireland was a banking problem while Portugal was an issue of growth and Debt. Ireland's program would be based upon clear conditionality and it would cease to be a low-taxed country. But tax increases are up to the Irish Gov't. - German Finance Ministry Spokesman Kreienbaum commented that Ireland had formally requested aid and such bailout depended on Ireland's austerity measures and if the Euro was threatened. The spokesperson added that no risk to Euro was seen from other member States
Currencies: Risk appetite continues to find some traction in the European morning but things seemed to have stalled after the initial burst of euphoria on the Irish agreement to seek a bailout from international lenders. Overall the dominos remain precarious in the peripherals with Portugal, Spain and Italy remaining on the radar. For the most part the peripheral spreads were narrower with the exception of Portugal. Slovakia Debt Agency (ARDAL) noted that it rejected all bids in its 4.5% 16-year bond auction citing yields would have been too high. The EUR/USD little changed from its Tokyo open at 1.3747. The risk aversion sentiment is not completely off the table at this time with dealers mumbling that China could still raise its interest rates at any time. Germany continues to talk tough on imposing conditions on any Irish bailout. Geopolitical/In the papers: - In the Telegraph, longtime critic of the EU, the British Foreign Secretary Hague raised doubts about the Euro's future, though he did say it was not possible to know whether the currency would collapse. - Commenting on retailers in the US, the Financial Times stated that companies were pushing up opening times for the seasonal 'Black Friday'. Wal-Mart is said to begin offering discounts at , while Sears is to open on Thanksgiving Thursday for the first time ever. - The prime minister of the Czech Republic Necas said the government will announce a reform package by March of next year, which will focus on many areas including pension reforms and taxation. - The Telegraph's Evans-Pritchard made comments on concerns related to Portugal's financial and economic conditions. The article noted Portugal's current account deficit is among the worst in the EU, and has one of the highest levels of private debt in the world. The article casted doubts to the country's fiscal concerns stating that it is hard to see how the country will meet its 2010 deficit target of 7.3%. It did note the high reliance of banks in Portugal on external funding. - Portuguese Social Democrats (opposition) leader Coelho said Public debt is above the government estimates of 82% at around 112% of GDP. He said that the state has for many years been removing from the budget a series of activities, which has made a large part of our numbers fictitious. The debt of state-run companies was not being included in the minority government's calculation of the public debt. In addition to public debt, he believes the budget deficit is about 9.5% of GDP v the minority government's 2010 target of 7.3%.
***Looking Ahead *** - 6:00 (IS) Israel to Sell ILS250M in 4.5% 2015 Bond; Sell ILS200M in 5% 2020 Bonds; Sell ILS250M in 3% 2019 I/L Bonds 23-Apr - 8:00 (PD) Poland Oct Core Inflation M/M: 0.2%e v 0.2% prior; Y/Y: 1.2%e v 1.2% prior - 8:30 (US) Oct Chicago Fed Nat Activity Index: -0.37e v -0.58 prior - 9:00 (FR) France Debt Agency (ATF) to sell up to â‚¬7.5B in 12-week, 25-week and 51 week Bills - 9:30 (EU) ECB Calls for Bids in 7-Day Main Refi Tender - 10:00 (EU) Euro-Zone Nov Advanced Consumer Confidence: -10e v -11 prior - 10:00 (MX) Mexico Sept Global Economic Indicator: 5.3%e v 7.3% prior - 10:00 (MX) Mexico Q3 GDP: 5.7%e v 7.6% prior - 10:00 (EU) Euro Zone Nov Advanced Consumer Confidence: -11e v -11 prior - 10:30 (IS) Israel Central Bank Interest Rate Decision: Expected to maintain the Base Rate unchanged at 2.00% - 11:00 (EU) ECB's Trichet participates in European Parliament Debate - 11:00 (US) Fed to Purchase $7-9B in Notes/Bonds - 11:30 (US) Treasury to sell $29B in 3-Month Bills; Sells $28B in 6-Month Bills - 13:00 (US) Treasury to sell $ 35B in 2-Year Notes - 13:30 (US) Fed's Kocherlakota Speaks in South Dakota -13:45 (EU) EU's Barnier Speaks to European Parliament Committee - 15:00 (EU) EU's Rehn Speaks to European Parliament Committee
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