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Thursday December 2, 2010 - 11:10:16 GMT
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| | Email European Market Update: Not Likely in ECB's genetic code to submit to market demands

Thursday, December 02, 2010 5:45:02 AM European Market Update: Not Likely in ECB's genetic code to submit to market demands


***Economic Data***
- (RU) Russia Gold & Forex Reserve w/e Nov 26th: $484.6B v $489.3B prior
- (FR) France Q3 ILO Unemployment Rate 9.7% v 9.8%e; Mainland Unemployment Rate: 9.3% v 9.4%e
- (IN) India Primary Articles w/e Nov 20th: 12.7% v 13.4% prior; Food Articles WPI Y/Y: 8.6% v 10.2% prior
- (SZ) Swiss Q3 GDP Q/Q: 0.7% v 0.5%e; Y/Y: 3.0% v 3.1%e
- (BR) Brazil Nov FIPE CPI: 0.7% v 0.7%e
- (SP) Spain Nov Net Unemployment M/M: 24.3K v 68.2K prior
- (HU) Hungary Sept Final Trade Balance: €540.4M v €548.0M prelim
- (SZ) Swiss Oct Real Retail Sales Y/Y: 3.5% v 4.1% prior
- (DE) Denmark Oct Unemployment Rate: 4.2% v 4.2%e
- (SA) South Africa Nov Naamsa Vehicle Sales Y/Y: 29.6% v 22.2% prior
- (UK) Nov PMI Construction: 51.8 v 51.3e
- (EU) Euro-Zone Q3 Preliminary
GDP Q/Q: 0.4% v 0.4%e; Y/Y: 1.9% v 1.9%e (second reading)
- (EU) Euro-Zone Q3 Preliminary Household Consumption Q/Q: 0.3% v 0.2%e; Gov't Expenditures: 0.4% v 0.3%e; Gross Fix Capital: 0.0% v 0.4%e
- (EU) Euro Zone Oct PPI M/M: 0.4% v 0.3%e; Y/Y: 4.4% v 4.3%e

Fixed Income:
- (SP) Spain Debt Agency (Tesoro) sells € 2.5B vs €2.75B Indicated in 2.5% 2013 Bonds; Avg Yield 3.717% v 2.527% prior; Bid-to-cover:2.3 x v 2.2x prior
- (FR) France Debt Agency (ATF) sold approx €5.36B vs €4.5-5.5B Indicated range in 2017, 2018 and 2025 bonds
- Sold €2.54B in 3.75% Apr 2017 OATs; avg yield 2.62% v 2.47% prior; Bid-to-cover: 2.7x v 2.5x prior
- Sold €1.02B in 4.25% Oct 2018 OATs; avg yield 2.92% v 2.76% prior; Bid-to-cover: 5.1x v 3.3x prior
- Sold € in 6.0% Oct 2025 OATs; avg yield 3.57% v 3.81% prior; Bid-to-cover:2.1 x v 2.4x prior
- (SW) Sweden sold SEK750M in 0.5% Index-Linked 2017 Bonds; Yield 0.852%
- (HU) Hungary Debt Agency (AKK) sold total HUF51B in 2014, 2016 and 2020 Bonds


Eurostoxx50 at 2747, +0.94%
, FTSE at 5688, +0.81%, CAC40 at 3698, +0.79%, DAX at 6884, +0.26%

- European shares rallied at the open as investors await ECB's decision during NY session. The bank is largely expected to maintain its interest rates unchanged at 1% given the uncertainty surrounding the peripherals. Markets moved on optimism that ECB may announce further action to tackle the debt crisis. According to analysts a QE may be a bit too much too soon but a step towards calming markets would be the expansion of its weekly Securities Market Programme. However, analysts warn against heightened expectations and note that a possible disappointment today will trigger risk aversion again.
- Out of
UK, travel group Tui Travel [TT.UK] rose about 0.8% following its preliminary FY10 results. Company beat on both net and revenue and noted that trading for both winter 2010/11 and summer 2011 remained positive. Company also announced an increase in its annual dividend. Kingfisher [KGF.UK] reported a decrease in net, revenues and like-for-like sales as house-related spending continue to decline. Shares rose in London trading, nonetheless. TNT [TNT.NV] rose over 5% after company announced that it would demerge its express unit and retain only its mail activities.

- ECB held hostage to market demands to lengthen unlimited liquidity operationsbut not likely not in the European genetic code to submit
- Spain PM: Have approached sovereign wealth funds for investments
- Monster online employment index M/M: 136 v 136 prior
- Australia Retail sales fall for the first time in eight months
- Good demand in Spanish bond sale, but refinancing costs rise
- Asia and European equities continue their rally and strive to end the year with the wind at their backs.
China rate hike chatter seems to have subsided for now

- German Econ Min Bruederle commented that
Germany's 2011 GDP would reach pre-crisis levels. He stressed that pumping too much money into the economy risked the creation of new asset bubbles. He noted that Germany was making step by step progress for a resolution of EU crisis but added that the ECB must remain independent. He commented that liquidity alone would not resolve the problems of heavily indebted countries. He express optimism that there was a good chance that Portugal and Spain would manage their matters without tapping the European rescue mechanism.
Spain Econ Min Salgado commented that Spain would only be required to issue around €30-31B of new debt in 2011 compared to earlier estimates around €45B planned. She added that the sale of stakes in state assets would allow Spain to issue less debt than originally envisaged next year. She reiterated that Spain would adhere to its deficit targets.
- Hungary Central Bank Karvalits commented that the NBH should further raise interest to curb inflationary expectations but he did not indicate size or timing of the next rate hike.
- IMF's Strauss-Kahn reiterated his view that IMF would respond if members sought assistance. The IMF chief also reiterated that global economic recovery remained fragile and uneven and the
US economic recovery was uncertain and any failure would have 'huge' global implications. Lastly he expressed that it was unlikely to encounter any double-dip recession but there was a possible tail risk

The continued risk appetite environment continued to aid the European currencies ahead of the ECB rate decision and the all-important press conference. The EUR/USD tested the 1.32 handle aided by good demand in Spanish 3-year bond sale (despite the higher yield). Overall the market expectations are to force the ECB in extending its unlimited liquidity operations past January but uncertainty remains over the exact 'ransom demands' are. The key question is would the market be satisfied with an extension of 3 months, 6 months, or a year. However, dealers whisper that it was not likely not in the European genetic code to submit.

Geopolitical/In the papers:
- Credit rating agency Moody's made comments on Ireland noting key credit drivers of mortgage borrower defaults are evolving, and expects delinquency levels to remain elevated. Defaulting borrowers in the country have typically been self-employed, located outside
Dublin and had their mortgages originated during the market peak. Going forward, the key drivers are likely to be a combination of loan-to-value (LTV) ratios, affordability, employment status and location. The report also highlights that one of the main causes of default in any environment is unemployment.
The agency also placed the Aaa(sf) ratings on six Irish residential mortgage-backed securities (RMBS) and one balance sheet collateralized loan obligation (CLO) on review for a possible downgrade. The agency believes the medium term stress on Irish structured finance transactions will be greater than expected, and anticipates further stress on borrowers from the austerity measures necessary to manage the increasing government debt burden.
- A report in the Financial Times discussed five possible options for the ECB as it looks for ways to restore confidence: Increase ECB bond purchases (At the moment, only €67 billion has been spent under the program); expand the size of the EU rescue fund beyond the €750 billion mechanism; issue 'eurobonds' with lower borrowing costs; centralize fiscal policy into a 'fiscal union', requiring national lawmakers to surrender control over budget and taxes; and the 'doomsday scenario', an EU break-up. In the last possible scenario, the article noted that a German return to the deutschemark would be catastrophic as it would price its exporters out of business with a sharply higher currency.
- According to data from the Bank for International Settlements (BIS), banks in
Ireland are among the most exposed to the EU's peripheral countries. Press reports reveal that the data show Irish banks had the 5th largest exposure to Italy, as outstanding credit to Italy totals about $41 billion. Irish banks also ranked 5th, 5th, and 7th in terms of exposure to Portugal, Greece, and Spain, respectively. The feature in the Financial Times also noted Japan banks are the 6th biggest lenders to Ireland and Italy, and US banks are also highly exposed to Ireland and Spain.
- The Telegraph's Evans-Pritchard looked at the calls for additional action from the ECB in order to slow the contagion in the EU.
Spain had called out for the ECB to significantly increase its bond purchases. Citing Citi economist and former BoE member Buiter, Greece, Ireland and Portugal may already insolvent with Spain close behind.

***Looking Ahead ***
- 6:00 (CZ) Czech Republic to sell CZK5.0B in 364-Day Bills
- 6:00 (BR) Brazil Oct Industrial Production M/M: % v 0.6%e; Y/Y: % v2.5%e
- 7:45 (EU) ECB Interest Rate Decision: Expected to maintain the Main Refi rate unchanged at 1.00%
- (US) Nov ICSC Chain Store Sales Y/Y: No est v 1.6% prior
- 8:30 (SI) Singapore Nov Purchasing Managers Index: 51.2e v 50.7 prior; Electronics Sector Index: 50.2e v 49.3 prior
- 8:30 (US) Initial Jobless Claims: 424Ke v 407K prior; Continuing Claims: 4.20Me v 4.182M prior
- 8:30 (EU) ECB's Trichet speaks at monthly press conference
- 10:00 (US) Oct Pending Home Sales M/M: -1.0%e v -1.8% prior; Y/Y: No est v -24.9% prior
- 11:00 (IC) Iceland Q3 Current Account (ISK): No est v -9B prior
- 11:00 (US) Fed to Purchase $7-9B in Notes/Bonds
- 12:20 (US) Fed's Plosser speaks on economic outlook in Rochester, NY
- 12:30 (US) Fed's Bullard speaks to Economists in Washington
- 14:00 (US) Fed's Duke speaks on Consumer Credit in Philadelphia



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