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Wednesday November 24, 2010 - 11:06:47 GMT
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European Market Update: USD maintains firm tone as contagion fears trump the dovish FOMC minutes (TTN)

Wednesday, November 24, 2010 5:54:12 AM

 European Market Update: USD maintains firm tone as contagion fears trump the dovish FOMC minutes


***Economic Data***
- (CZ) Czech Nov Business Confidence: 11.9 v 10.8 prior; Consumer Confidence: -11.8 v -14 prior; Consumer & Business Confidence (Composite): 7.2 v 5.9 prior
- (AS) Austria Sept Industrial Production M/M; -1.6% v 1.3% prior; Y/Y: 3.6% v 8.2% prior
- (GE) Germany Nov IFO Business Climate: 109.3 v 107.5e; Current Assessment: 112.3 v 110.4e; Expectations Survey: 106.3 v 104.7e
- (IT) Italy Sept Retail Sales M/M: -0.2% v 0.1%e; Y/Y: 0.3% v 0.7%e
- (NO) Norway Sept AKU Unemployment Rate: 3.5% v 3.4%e
- (UK) Q3 Preliminary
GDP Q/Q: 0.8% v 0.8%e; Y/Y: 2.8% v 2.8%e
- (UK) Q3 Preliminary Private Consumption 0.3% v 0.6%e; Government Spending:0.4% v 0.4%e; Gross Fixed Capital: 0.6% v 1.3%e; Exports: 2.2% v 1.5%e; Imports: 0.7% v 1.2%e
- (UK) Q3 Preliminary Total Business Investment Q/Q: -0.2% v 0.8%e; Y/Y: 4.6% v 5.6%e
- (UK) Sept Index of Services M/M; 0.6% v 0.5%e; 3M/3M: 0.6% v 0.6%e
- (SA) South Africa Oct CPI (all items) M/M: 0.2% v 0.1%e; Y/Y: 3.4% v 3.3%e
- (EU) Euro Zone Sept Industrial New Orders M/M: -3.8% v -2.5%e; Y/Y: 13.5% v 15.3%e
- (BR) Brazil Nov FGV Consumer Confidence: 125.4 v 121.8 prior

Fixed Income:
- (GE) Germany sold €4.76B iin new Jan 2021 Bund; avg yield 2.59% v 2.29% prior; Bid-to-cover:1.2 x v 1.4x prior
- (EU) ECB allotted $60M in USD liquidity operation at fixed 1.19%
- (UK) BOE does not allot any dollars in its USD liquidity operation
- (SW) Sweden sold SEK2.5B in 3% 2016 bonds; avg yield 2.41%
- (EU) ECB allotted €38.2B in 3-Month LTRO Tender at Fixed 1.0%

** Notes/Observations:
- European peripherals continue to widen on the domino fears; S&P lowered Ireland Sovereign debt by two notches during Asia session
- Surging German IFO data sidelines on price action
- FOMC Minutes: Fed pretty open about weaker USD
- China and Russia agree to use their own currencies for bilateral trade.
- US Insider trading scandal widens
- Oracle awarded $1.3B in jury verdict against SAP.GE


Eurostoxx at 2746, +0.3%, FTSE100 at 5613, +0.6%, CAC40 at 3734, +0.2%, DAX at 6743, +0.6%

- European shares opened in positive territory as markets initially priced in EU sovereign debt concerns, including a downgrade of Ireland by S&P, and the conflicts in the Korean peninsula. Mining stocks were higher as metal prices advanced. However stocks did drift lower during the session, while remaining in positive territory, as EU debt concerns have yet to ease. While S&P downgrade of
Ireland hardly shocked the markets, especially since the details of the Irish budget are due today in the NY morning, the downgrade did not help the banking sector as its shares sank due to heightening fears of contagion. In fact, Portugal spreads continued to widen due to uncertainties on the Irish bailout and conflicting statements from EU members on the future of the single currency itself. Bank of Ireland lost about 12% in the session after the Irish government announced it would raise its stake to over 50% as part of the bailout package.
- SAP [SAP.GE] also fell in the session after a court decision ordered the company to pay $1.3B to rival Oracle for copyright infringement by TomorrowNow, a maintenance unit that has ceased to exist.
- British catering company Compass Group [CPG.UK] rose almost 3% in the session after beating estimates in its full year report. Johnson Matthey [JMAT.UK] also rose after publishing its first half figures which had increased on a yearly basis. Company also increased its dividend.

- China PBoC Vice Gov Hu stated that it saw inflationary pressures rising and reiterated that global inflows were making it tough to manage liquidity but pledged to implement various tools to maintain liquidity and price stability
- The EU officials were out in force to counter Chancellor Merkel remarks from Tuesday that the Euro was in an 'exceptionally' serious situation
- ECB's Mersch: Contagion was not an issue for the Euro region and he believed that market participants can differentiate between countries
- EU Junker stated in an CNBC interview that he believed that the euro currency was not in danger but conceded that EU must tackle the imbalances and divergences within the region
- Spain Econ Min Salgado commented that there was no risk that Spain would need any bailout and that the planned austerity measure were providing the intended results. She added that the situation in
Spain differed from that seen in both Ireland and Greece. She added that markets needed to focus on the country's fundamentals and that its financial sector was solid. She called upon political unity on the country's economic measures and reiterated that the pension reform bill would be presented prior to the end of March. Spain's autonomous regions are lowering their debt in line with expectations
- OPEC: Looking at the possibility of Over-the-counter (OTC) in oil trading with IEA
- IFO Abberger commented that the German domestic demand was playing greater role in its recovery, which was now broad based. He noted that the Euro zone debt crisis was not affecting German companies noting that those countries in crisis were not main German exports markets. He did caution that any debt contagion to other European countries was a big risk for
Germany. Lastly he noted that the ECB interest rates of 1.0% remained at appropriate level. Overall the IFO Economist stated that German economy was gaining momentum with the IFO index back at pre-crisis levels.
- Sweden Central Bank (Riksbank) Dep Gov Svensson (dove) commented that the current Monetary Policy was tighter than justified and added that any 'in-depth analysis' would not justify a tighter monetary policy stance. He cautioned that monetary policy appeared to have been aimed at trying to limit the increase in house prices and in household indebtedness and such targeting could lead to high costs for the real economy in terms of lower production and employment, and higher unemployment.
- Ireland PM Cowen begin parliamentary debate on budget and noted that the EU/IMF aid package was being discussed, though final amount yet to be finalized but €85B has been discussed. The package would be an overdraft facility but not all would be drawn upon. He noted that the bank recapitalization plans and interest rate discussions had yet to be completed.

The USD maintained a firm tone in the session. Dealers noted that the overall assessment was that contagion fears trump the dovish F
OMC minutes for the greenback at this time. The better German IFO data was largely ignored as continued peripheral concerns remained the price driver. EUR/USD hit fresh two-month lows as a key chart level of 1.3330 was breeched and tested 1.3285 before settling down.
On the peripherals spreads the widening trend continued into the session. The 10-year Irish/German spread was approaching 590bps but was steady from late Tuesday and post S&P sovereign downgrade on the
Emerald Island. Other peripherals were not as fortunate. The 10-year Portuguese/German spread stated the session approaching 440bps and then surged tp probe above 460bps. The Spanish/German premium hit fresh post EMU highs above 240bps.
The USD/JPY was steady above the

Geopolitical/In the papers:
Ireland's national radio (RTE) reported on bank reform plans stating that the EU/IMF will provide €85 million for recapitalization and public finances. As a result, Allied Irish Banks may join Anglo Irish Bank and become fully nationalized. Irish banks will be required to increase capital ratios to 12% from 8%. The Financial Times later reported that the Irish government will increase its stake in the Bank of Ireland to over 50% from its current 36% ownership.
Ireland's prime minister Cowen survived a no-confidence vote within the ruling Fianna Fail party. Also, the party said it had sufficient support to pass the 2011 budget. Note the coalition government continues to suffer from declining polls following the acceptance of an aid package for the country.
- Unions in
Portugal have planned a general strike for Wednesday the 24th of November. Analysts expect this to severely affect various public sectors including transport, industry and schools. The unions, General Union of Workers (UGT) and General Confederation of the Portuguese Workers (CGTP), which are the country's main unions, will be united for the first time in more than 20 years. The strikes address the government's planned austerity measures, which are expected to be presented in parliament this Friday.
- Both
China and Russia have agreed to drop the US dollar for the use in bilateral trade according to Chinese press. Note the trade between China and Russia in the first nine months of the year is up 56% year-on-year to $42 billion.

***Looking Ahead ***
- (MA) Malaysia Oct
CPI Y/Y: 1.9%e v 1.8% prior
- 6:00 (CZ) Czech Republic to sell CZK7.0B in Sept. 2021 bonds
- 6:00 (RU) Russia to sell up to RUB20.0B in OFZ Bonds
- 6:00 (PD) Poland Central Bank Gov Belka, EBRD's Mirow Speak at Bruegel Conference
- 7:00 (US) MBA Mortgage Applications w/e Nov 19th: No est v -14.4% prior
- 7:20 (UK) Bank of England's Sentance Speaks in Belfast
- 8:00 (RU) Russia to sell up to RUB15.5B in OFZ Bonds
- 8:30 (US) Oct Durable Goods Orders: 0.1%e v 3.5% prior; Durables Ex Transportation: 0.6%e v -0.4% prior (revised)
- 8:30 (US) Oct Personal Income: 0.4%e v -0.1% prior; Personal Spending: 0.5%e v 0.2% prior

- 8:30 (US) Oct PCE Core M/M: 0.0%e v 0.0% prior; Y/Y: 1.0%e v 1.2% prior; PCE Deflator Y/Y: 1.3%e v 1.4% prior
- 8:30 (US) Initial Jobless Claims: 435Ke v 439K prior; Continuing Claims: 4.275M v 4.295M prior
- 9:00 (BE) Belgium Nov Business Confidence: -3.0e v -2.8 prior
- 9:00 (IR) Ireland publication of its 4-year outlook
- 9:30 (TU) Turkey Nov Capacity Utilization: No est v 75.3% prior; Industrial Confidence: No est v 107.2 prior
- 9:55 (US) Nov Final University of Michigan Confidence: 69.5e v 69.3 prior
- 10:00 (US) Sept House Price Index M/M: 0.0%e v 0.4% prior; Q/Q: -1.1%e v 0.9% prior
- 10:00 (US) Oct New Home Sales: 312Ke v 307K prior
- 10:00 (MX) Mexico Oct Preliminary Trade Balance: -$600Me v -$560M prior
- 10:30 (US) DOE Weekly Energy Inventories: Crude: -2Me; Gasoline: -1Me; Distillate: -1.5Me; Utilization: 84.2%e
- 11:00 (US) Kansas City Fed Manufacturing
- 12:00 (US) IEA Natural Gas Inventories
- 13:00 (US) Treasury to sell $29.0B in 7-Year Notes



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