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Friday November 26, 2010 - 11:02:17 GMT
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| | Email European Market Update: Risk aversion rises over contagion concerns that Peripherals might spread into Semi-core of Europe

Friday, November 26, 2010 5:56:01 AM European Market Update: Risk aversion rises over contagion concerns that Peripherals might spread into Semi-core of Europe


***Economic Data***
- (GE) Germany Oct Import Price Index M/M: -0.2% v 0.0%e; Y/Y: 9.2% v 9.4%e
- (FI) Finland Oct Preliminary Retail Sales Volume Y/Y: 2.4% v 5.9% prior
- (FR) France Oct Consumer Spending M/M: -0.7% v -0.5%e; Y/Y: -0.3% v +0.4%e
- (RU) Russia Central Bank (CBR) leaves Refi rate unchanged at 7.75%; As Expected
- (GE) Germany Nov CPI - Saxony M/M: 0.0% v 0.0% prior; Y/Y: 1.5% v 1.4% prior
- (HU) Hungary Oct Unemployment Rate: 10.9% v 10.9%e
- (SP) Spain Sept Mortgages-capital loaned Y/Y: -17.6% v -15.7% prior; Mortgages on Houses Y/Y: -15.9% v 3.4% prior
- (TT) Taiwan Oct Leading Index M/M: -0.4% v -0.4% prior; Coincident Index M/M: 0.5% v 0.6% prior
- (SW) Sweden Oct Trade Balance (SEK): 5.6BB v 6.0Be v 8.1B prior
- (EU) Euro Zone M3 Money Supply: 1.0% v 1.3%e; M3 Three-month avg: 1.1% v 1.1%e
- (GE) Germany Nov CPI - Hesse M/M: 0.1% v 0.1% prior; Y/Y: 1.2% v 1.0% prior
- (GE) Germany Nov CPI - Brandenburg M/M: 0.0% v 0.0% prior; Y/Y: 1.1% v 1.0% prior
- (NO) Norway Q3 Manufacturing Wage Index Q/Q: 2.8% v 0.1% prior
- (MA) Malaysia Oct
CPI Y/Y: 2.0% v 1.9%e
- (GE) Germany Nov CPI - North Rhine-Westphalia M/M: 0.1% v 0.2% prior; Y/Y: 1.5% v 1.2% prior
- (SZ) Swiss Nov KOF Swiss Leading Indicator: 2.12 v 2.11e


Eurostoxx at 2717, -1.71%
, FTSE100 at 5624, -1.31%, CAC40 at 3700, -1.60%, DAX at 6796, at -1.20%

- European shares extended losses during the session amidst the same fears as the in the beginning of the week - European debt concerns and Korean tensions. Situation in
Portugal has escalated following an article in the German press reporting that the EU and especially Spain are pushing the country to ask for aid. An avalanche of denials followed from EU, Germany, Portugal and Spain repeating that the country was under no pressure to request bailout. However, this has done little to tame the surging spreads. Portugal faces the final vote in parliament today for its 2011 deficit plan. Meanwhile, North Korea reported to be deeply enraged by South's provocation, warning that any escalated confrontation would lead to war. North Korea's anger is a result of South Korea and US planned joint naval drilling on Nov 28th .
Banks were among the worst performers in the session with Banco Espirito Santo in
Portugal trading down about 2%. Spanish bank Santander also fell about 4% while Bank of Ireland's weekly losses had been the biggest since early 2009. Miners also lost among speculation that China may tighten its monetary policy after PBOC adviser Li Daokui stated that further rate adjustments are likely and the monetary would be adjusted as the economy stabilizes. Rio Tinto [RIO.UK] is trading down by 2.7% despite reporting that it would spend $2B over 3 years in order to expand its copper assets. Out of Norway, utility name Fortum Oyj [FUM1V.FH] reported that it signed a nuclear power agreement with the Russian State Atomic Energy Corporation. Shares rallied about 1% at the news.

- Portugal's parliament to hold its final debate and vote on the 2011 budget proposal, which intends to bring public finances in line with European Union requirements by 2013.
- Concerns that the current peripheral situation will move into semi-core countries of the Euro Zone
- Planned South Korea and US military drills scheduled for Nov. 28th could provoke North Korea to further action
- China Foreign Ministry opposes any military acts in its "exclusive economic zone" without permission

- Earlier during the Asian session an FTD article reported that a majority of EU members were pushing Portugal to request aid bailout from the European rescue fund. The session was marked by various peripheral officials responding to that article.
Spain PM Zapatero ruled out any chance for rescue aid for the country. The PM cited that the country's public debt was below the EU average. He warned that market speculators betting against Spain would be mistaken. He added that the must complete Caja restructuring as quickly as possible.
German Finance Ministry (MOF) Not pressuring
Portugal to seek any bailout
Portugal PM Socrates stated that his country was not under pressure to seek bailout
- German Fin Min spokesperson also joined the chorus and stated that it was not pressuring any country to seek rescue aid
- The EU/IMF bailout discussions entering an interesting phase. Reportedly the discussions might induce senior bond investors to share burden which was one of several proposals being discussed
- Reportedly EcoFin could approve the IMF/EU bailout to
Ireland before the weekend is over with a planned teleconference on Sunday. The discussions seem to define the speculated €85B program distribution seen with €35B to financial sector and €50B to gov't . The source of funding from IMF, EFSM and EFSF have yet to be decided but €20B might come from the IMF
- Poland Central Bank Glapinski (a noted Hawk) reversed his view and noted that it was not appropriate to raise interest rates as it could encourage sharp appreciation in PLN currency
- ECB Bini-Smaghi reiterated the European view that the Euro currency was not in danger
- Reportedly German upper house passes the nuclear fuel tax

- The Euro price action continued to center on the peripherals situation and the fear of contagion. Thus the spreads continue to widen during the European session and this hurt the euro. Despite denials from both
Portugal and Spain PMs on seeking potential aid, the market seemed relentless in its speculative attack. There was concern that the situation could morph from the peripheral section of Europe and into the semi-core countries like Belgium and Austria. Again the Spanish/German 10-year premium at fresh record level over 255bps. The outright Spain 10-year yield tested 5.25%, which was wider by over 50bps in session (highest level since 2002). On Ireland there were vague rumors of 'rejected deals' in the bond portion of bank-sector bailout discussions with the IMF/EU. The EUR/USD tested fresh two-month lows below 1.3220 before pausing.
- The USD/JPY pair approached the 84 handle on the
Korean Peninsula situation remained 'jittery'. Sound of artillery firing earlier today appeared to be within confines of North Korean borders and part of that country's military drills. There was concern that perhaps North Korea was considering declaring war due to the planned South Korea and US military drills scheduled for Nov. 28th.

Geopolitical/In the papers:
- The conflict on the Korean peninsula continued to escalate as North Korea considered declaring war against its southern neighbor due to arranged military drills with the US. There were later reports of artillery fired by
North Korea, though it appeared to be part of military drills as it was contained within the northern borders. The Chinese Foreign Ministry reportedly had stated that is opposes any military actions in its economic zone, namely the Yellow Sea, without permission. As a reminder, South Korean and the United States are scheduled to stage a joint naval drill in waters off the west coast of the Korean Peninsula from November the 28th to December 1st.
- There were reports that the EcoFin could approve
Ireland's bailout package before the start of next week. The discussions seemed to define the speculated €85 billion program distribution split with €35 billion seen given to financial sector and the remaining €50B toward the government. The source of funding from IMF, EFSM and EFSF has yet to be decided, though the €20 billion might come from the IMF.

***Looking Ahead ***
- (GE) Germany Nov Preliminary Consumer Price Index M/M: -0.1%e v 0.1% prior; Y/Y: 1.3%et v 1.3% prior
- (GE) Germany Nov Preliminary CPI EU Harmonized M/M: -0.1%e v 0.1% prior; Y/Y: 1.4%e v 1.3% prior

- (GE) Germany Nov CPI - Baden Wuerttemberg M/M: % v 0.0% prior; Y/Y: % v 1.1% prior
- (PE) Peru Q3 GDP Y/Y: % v 9.3%e v 10.1% prior
- 6:00 (GE) Germany Nov CPI - Bavaria M/M: No est v 0.1% prior; Y/Y: No est v 1.4% prior
- 6:00 (IR) Ireland Oct Retail Sales Volume M/M: No est v -0.9% prior; Y/Y: No est v -0.2% (revised)
- 10:00 (MX) Mexico Central Bank Interest Rate Decision: Expected to maintain the Overnight Rate unchanged at 4.50%
- 12:00 (FR) France Oct Net Change in Jobseekers: -3.6Ke v 4.6K prior; Total Jobseekers: No est v 2.70M prior
- 14:00 (AR) Argentina Oct Supermarket Sales Y/Y: No est v 17.9% prior



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