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Monday December 6, 2010 - 11:04:32 GMT
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| | Email European Market Update: EcoFin meets to dicuss increasing the size of the EU €750B safety net with German opposition

Monday, December 06, 2010 5:50:34 AM European Market Update: EcoFin meets to dicuss increasing the size of the EU €750B safety net with German opposition


***Economic Data***
- (CZ) Czech Q3 Avg Real Wage Y/Y: 0.1% v 0.7%e
- (SZ) Swiss Nov Foreign Currency Reserves (CHF) 212.4B v 211.9B prior
- (TT) Taiwan Nov CPI Y/Y: 1.5% v 0.9%e; WPI Y/Y: 2.4% v 2.9%e
- (SW) Sweden Oct Service Production M/M: 0.5% v 0.1; Y/Y: 4.5% v 6.8 prior
- (UK) Nov New Car Registrations Y/Y: -11.5% v -22.2% prior
- (EU) Euro Zone Dec Sentix Investor Confidence: 9.7 v 11.0e

Fixed Income:
- Germany sold total €4.285B in 6-month BuBills; avg yield 0.5785% v 0.7849% prior; Bid-to-cover: 2.1x v 1.1x prior
- (NV) Netherlands Debt Agency (DSTA) sold approl €6.1B in Feb, Apr and May 2011Bills vs €7.5Be Indicated
- Sold €2.33B in Feb 2011 Bills vs. €2.5B indicated; avg yield 0.510% v 0.670% prior
- Sold €1.99B in Apr 2011 Bills vs. €2.5B Indicated ; avg yield 0.600% v 0.785% prior
- Sold €1.75B in May 2011 Bills vs €2.5B Indicated ; avg yield 0.625%


Eurostoxx50 at 2766, -0.59%,
FTSE100 at 5745, flat, CAC40 at 3734, -0.42%, DAX at 6950 at +0.04%

- European shares fluctuated during the EU session. Trading was supported by Bernanke's interview on '60 minutes' where he defended the QE2 and left open the possibility of expanding the bond purchases further in order to stimulate growth. The rally was dampened by Eurozone debt concerns as investors remain cautious ahead of a Eurozone finance ministers meeting on Tuesday and a disappointing job report out of the
US. European finance minister continue to show signs of discord in their rhetoric and vision for the crisis solution. While Belgian Finance Minister, supported by the IMF, is in favor of an increase of the bailout fund, his counterparts in Germany and France oppose it. Furthermore, Luxembourg PM and Italian Finance Minister expressed their support for the issuance of European sovereign bonds in order to support and affirm the single currency - a solution rejected by the German Finance Minister because its implementation would require fundamental changes to the EU treaties. As peripherals continue to widen, banks continue to trade lower. Miners led the rally as Rio Tinto made a A$3.5B offer to acquire Riversdale Mining. UBS [UBSN.SZ] declined in the session not only as a result of banking sector weakness but also because the CFO declared he would step down in May 2011.
- In M&A news, Hermes [RMS.FR] fell about 3% after press reported that the controlling shareholder had created a holding company in order to defend the company from a takeover bid from LVMH. Meanwhile, De La Rue gained about 20% after confirming that it had received a highly preliminary and opportunistic approach. Earlier during the European session, Telegraph had reported that it had rejected a £800M takeover bid from Oberthur Technologies. Punch Taverns gained over 10% after London Mail reported that CVC Capital Partners was considering making an offer for the company.
- French President Sarkozy travelled to
India with about 70 business leaders which prompted the signing of €15B worth of deals with the emerging nation. Among the contracts, France and India signed a €1.5B agreement related to Mirage fighters where, additionally Thales [HO.FR] may supply missiles for the fighters in a deal worth €700M. Company also stated that its UK's unit earnings may decline by 66% but its guidance was to remain intact thanks to French business strength. Shares opened higher but are now trading in the red. Areva [CEI.FR] also is expected to sign an agreement with India according to which the French company will build two nuclear reactors to meet India's energy demands.

- Fed Chairman Bernanke: "Certainly possible that Fed could buy more than $600B in assets"; Undervalued CNY currency makes China dependent on US monetary policy - 60 Minutes
- Euro Group Finance Ministers meet to discuss whether to expand a €750B safety netb
- ECB's Noyer: Effective Exchange rates suggest that Euro a bit on the strong side; ECB to keep current monetary policy steps in place until end Q1 2011
- South Korea has began a major live-ammunition fire drill at 29 locations
- Hungary sovereign rating cut 2 notches to lowest level of investment grade by Moody's

- Moody's cut the sovereign rating of Hungary by two notches to "Baa1" ; the lowest level of investment grade.
The agency noted that it had increased concerns over the country's fiscal sustainability that were based on temporary measures and saw its structural budget deficit set to deteriorate. It also noted that
Hungary had a higher external vulnerabilities compare to its peers.
Austria Chancellor Faymann commented that he did not rule out that Spain would need outside assistance but stressed it should do everything to avoid aid. He added that the EcoFin sought a permanent crisis mechanism which would involve the private sector
- Spain Fin Min Salgado reiterated in the French press that Spain would not seek international aid as the fundamentals did not justify the request for aid
- ECB's Orphanidies reiterated that ECB has an active presence in the bond market and stressed that the markets must not underestimate the EU's solidarity. He reiterated that it was too early to declare victory in financial crisis and was up to Portugal Gov't to determine whether to apply for aid
Germany reiterates its opposition to the issuance of Eurobonds but stressed it was commitment to the Euro. Germany also reiterated that it sees no need to expand EFSF.

- Market participants decoupled on views regarding Bernanke's 60-monutes interview. Commodities reacted inflationary implications to the Fed's commented that it could buy more than the $600B indicated. Spot gold came within $5/oz of hitting fresh al-time highs (Gold price in GBP did hit all-time highs and JJP-denominated gold hit its best level since 1983). Front-month NYMEX crude came close to retest the $90/barrel (last achieved back in Oct 2008)
- The FX markets seemed to take relief that Bernanke saw limited chances of a double-dip recession. Thus despite the early rise in commodity prices, the USD maintained a firmer tone in the session. The upcoming Irish budget vote on Dec 7th provided some unease for the Euro and the peripheral spreads gradually widened over the course of the morning. The sovereign downgrade of
Hungary by Moody's contributed to possible tailwinds on the European debt crisis. The EUR/USD entering the NY morning testing 1.3270 and lower by almost 150 pips from the Tokyo open. EUR/CHF softer by 50 pips but managed to hold above the 1.30 handle.

Geopolitical/In the papers:
- According to the press, banks in
Ireland will have to accelerate asset sales in order to maintain qualification for funding by the IMF and European Union. Bank of Ireland is expected to have to sell close to €20 billion in loans, and Allied Irish Banks may have to sell approximately €15 billion in loans. Both Bank of Ireland and Allied Irish Banks have a combined loan book of about €200 billion. As a reminder, from November 28th, the Irish government reached a formal agreement with the EU/IMF for an €85 billion bailout package.
- Coming ahead of tomorrow's initial parliamentary budget vote in
Ireland, in an Irish survey reported in the Weekend edition of the Financial Times, support for the ruling Fianna Fail fell to 13% of first preference votes, placing the party behind Fine Gael, Labour and Sinn Fein. This is the first survey since the announcement of the €85 billion bailout package. Prime Minister Cowen's popularity also fell and is now at an all-time single digit low of 8%. In related news, Ireland minister Dempsey voiced concerns over tomorrow's budget vote on national radio stating they were facing the most difficult budget, and that all budget related votes are to be tricky. Furthermore, in the Irish press, two Independent ministers have yet to decide on tomorrow's budget vote. Independents Healy-Rae and Lowry were mentioned in the Irish press as expected to support the 2011 budget, though their decision is to be decided upon prior to tomorrow's vote. There also reports of opposition member Creighton negotiating terms, including the possibly of abstaining, to secure an initial passage of the budget. Note the current government has a thin two-seat majority including the aforementioned Independents Healy-Rae and Lowry.
- The Telegraph's Evan's Pritchard noted the Royal Bank of Scotland (RBS) told clients to buy protection against the possible risk of a sovereign default in
China. The recommendation to buy China's 5-yr credit default swaps (CDS) is one of RBS' top trade ideas for 2011. RBS cited China's credit bubble and the country's inflation levels, and noted that its call is not a forecast that China will default, but rather insurance against the 'fat tail risk' of a hard landing.

***Looking Ahead ***
- (PO) Portugal Oct Industrial Sales M/M: % v 19.9% prior; Y/Y: % v 7.4% prior
- 6:20 (GE) German Chancellor Merkel and Polish Premier Tusk meet for talks in Berlin
- 6:30 (CL) Chile Oct Economic Activity Y/Y: No est v 5.5%e v 6.5% prior
- 7:00 (BE) Belgian National Bank Presents Bi-Annual Economic Outlook
- 7:30 (BR) Brazil Nov Vehicle Sales: No est v 303.2K prior; Vehicle Production: No est v 321.8K prior; Vehicle Exports: No est v 78.1K prior - Anfavea
- 8:30 (CA) Canada Oct Building Permits M/M: No est v 15.3% prior
- 9:00 (FR) France Debt Agency (ATF) to sell up €7.0B in 3-month, 6-month and 1-year Bills
- 9:30 (EU) ECB Calls for bids in Main 7-Day Refi and 1-Month Tenders
- 10:00 (CA) Canada Nov Ivey Purchasing Managers Index: No est v 56.7 prior
- 11:00 (MX) Mexico Nov IMEF Manufacturing Index: No est v 53.4 prior; Non Manufacturing Index: No est v 52.3 prior
- 11:00 (EU) Euro-Area Finance Ministers Meet in Brussels
- 11:00 (US) Fed to Purchase $1.5-2.5B in Notes/
- 11:30 (US) Treasury to sell $29B in 3-Month Bills and $28B in 6-month Bills
- 13:00 (US) Fed's Lacker Speaks on Economic Outlook in NC
- 22:30 (AU) Australia Central Bank (RBA) Interest Rate Decision: Expected to maintain the Cash Target unchanged at 4.75%
- Tuesday: (IR) Ireland Parliament votes on 2011 Budget



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