European Market Update: Bailout prospects narrows peripheral spreads in session

***Economic Data***
– (BR) Brazil Jan FIPE CPI: 1.2% v 0.5% prior
– (SP) Spain Jan Net Unemployment M/M: +130.9KK v 83.9Ke
– (HU) Hungary Nov Final Trade Balance: € v €651.5M prelim
– (IC) Iceland Central Bank (Sedlabanki) cuts 7-day Lending rate by 25bps to 4.25%
– (NO) Norway Nov AKU Unemployment Rate: 3.6% v 3.6%e
– (UK) Jan PMI Construction: 53.7 v 49.5e
– (EU) Euro-Zone Dec PPI M/M: 0.8% v 0.7%e; Y/Y: 5.3% v 5.2%e
– (MA) Malaysia Dec Trade Balance (MYR): 9.7B v 8.0Be v 9.0B prior; Exports Y/Y: +4.6% v -0.9%; Imports Y/Y: 11.5% v 5.3%e

Fixed Income
– (PO) Portugal Debt Agency (IGCP) sold €1.25B vs €750-1.25B Indicated range in 6-month and 12-month Bills
– Sells €455M in 6-month Bills; Avg Yield 2.984% v 3.686% prior; Bid-to-cover: 4.8x v 2.6x prior
– Sells €800M in 12-month Bills; Avg Yield 3.710% v 4.029% prior; Bid-to-cover: 2.6 v 3.1x prior
– (EU) ECB allotted $70M in 7-day USD liquidity operation at 1.17%
– (RU) Russia sold RUB53.2B vs RUB30B Targeted in OFZ Bonds

**** SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM ***
***Notes/Observations:
– Hope that Europe will hammer out EFSF deal at a summit on Friday, Germany likely seen waiting until a March 24-25 to finalize any agreement.
– Egypt: Mubarek to step down in Sept but fails to quell anger. Army tells people to resume a normal life; curfew hours shortened
– Yemen President Saleh not seek term extension; Jordan previously reshuffled Cabinet
– Commodities continue to move higher; CRB Index at fresh 2.5 yr highs

Equities:
FTSE 100 +0.90% at 6010, DAX flat at 7187, CAC 40 flat at 4075, IBEX 35 up 0.20% at 10,984, FTSE MIB +0.60% at 22,651, SMI +0.10% at 6563

– European shares were trading choppily throughout the session but remained in positive territory thanks to corporate earnings which supported risk appetite. Generally strong earnings mirrored the ones reported on Wall Street which boosted Dow Jones Industrial Average to its highest level since June 2008. Meanwhile, concerns over Egypt started to ease and further bolstered the rally as Egyptian 5-yr Credit Default Swap narrowed by 70 bps. European peripherals concerns have been muted for the past couple of weeks, in a stark contrast with the turmoil at the beginning of the year when speculations over peripherals’ debt and default reached their peak sending yields higher and financials lower. Few speakers have intervened mainly reiterating support or confidence while macro data have been relatively supportive of the embattled Eurozone. The swaps’ widening seems to be in remission as Portuguese, Greek and Spanish yields are falling while peripheral banks, especially Spanish, continue to rally. The recent outperformance may be attributed to Egyptian angst or German softening over the EFSF, as Berlin officials are trying to negotiate with the peripheral countries concerning reforms or alteration of Greek debt terms. Analysts also speculate that Spanish banks may not be as exposed as initially thought to Greek and Portuguese economy. We will know more by February 4th when EU leaders will discuss EFSF at a summit while Germany wants to reach an agreement by March 25th. However, the crisis is far from over.
– In individual names, mining group ENRC [ENRC.UK] gained over 3% after issuing its Q4 production update posting a 6.3% increase in ferrochrome volumes. Imperial Tobbaco [IMT.UK] was also higher by 4% after reporting in line with expectations and announcing that it would increase dividend payout to 50% of FY11 earnings. In M&A news, JJB Sports [JJB.UK] gained over 34% after confirming it was in merger talks with JD Sports fashion.
Not all earnings were positive. Swiss pharma name Roche [ROG.SZ] lost about 3% after disappointing results. Sales in the pharmaceutical division had decreased by 2% following the significant decline in Tamiflu and negative repercussions of the US healthcare reform. Another important challenge for Roche is FDA’s ruling that Avastin, company’s leading drug, should not be used in Docetaxel for treatment of HER2-negative breast cancer. The company reiterated that it would request a hearing with the FDA. In July 2010 Roche had estimated peak sales for Avastin at CHF8-9B and today it reported that the estimated peak sales in 2011 would be CHF7B. Company had anticipated that it would lose CHF1B in sales in case Avastin was revoked for the treatment of that specific cancer. Electrolux [ELUXB.SW] was also trading lower after disappointing results despite raising the dividend. The guidance for 2011 was for a modest growth. BBVA [BBVA.SP] reported better than expected results but forecast a significant decline in net interest income in Q1 and Q2. Shares are trading lower by 0.5%
6516

Speakers:
– BoE member Sentence reiterated his hawkish view that interest rates must be gradually raised at this time to avoid large rate hikes later – press interview
– BOE member Bean reiterated the MPC majority view that inflation was seen returning to target provided there were no additional shocks. He did noted that Interest rates would need to be increased if the spike in oil prices continued. Under such circumstances the BOE would have to conclude that inflation was becoming embedded.
– Thai Fin Min Korn commented that the long-term upward trend of the THB currency against the USD to continue but did add that spats of short term volatility could be experienced. The THB currency was at appropriate level under fundamental basis. The ministry was working with Central Bank to control inflation and that a narrower Govt budget deficit in the next FY to help fight inflation.
– German cabinet said to move forward planned 2012 solar subsidies reduction to July
– German Dep Fin Min reiterated the view that there was no crisis of the EUR currency but situation pertain to certain members. He noted that repairs to the European banking system were not finished, though no permanent damages to the economy. Interestingly he observed that it was uncertain if market calm would continue and stressed that Greece and Ireland must strictly enforce their austerity plans.
– Spain Econ Min Campa commented that he was confident euro zone leaders would soon reach an agreement on firming up the European Financial Stability Facility. Spain was open to discussing various different ideas on the table for expanding the EFSF, including increasing its lending capacity and allowing it to buy bonds.
– Egypt Armed Forces spokesperson commented that the people’s message has been delivered and told protestors to resume normal life.
– Yemen President Saleh stated that he would not seek a term extension nor transfer of power to his son. Nonetheless the opposition party Islah would still hold a rally on Thursday, Feb 3rd as planned.
– UK Institute of Fiscal Studies (IFS) stated that UK 2010-11 gov’t borrowing to undershoot its target. It urged UK government to refrain from fiscal loosening, which might prompt BOE to raise interest rates

Currencies/Fixed income:
– Risk appetite began the session on a positive note as markets seemed relieved that the situation in Egypt did not escalate. The domino effect continued to simmer in the region after Yemen President Saleh stated that he would not seek term extension nor transfer of power to his son. The GBP continued to be the beneficiary of the Mid-east drama and GBP/USD posted 3-month highs above 1.62. Also aiding the GBP were hawkish comments from MPC members Sentence and Bean. BoE Deputy Bean admitted that a rate rise may be necessary.
– The EUR/USD maintained a foothold above the 1.38 handle throughout the session. The euro zone December PPI data re-enforced the recent ECB concerns over the short-term inflation outlook. Dealers also have pointed out that recent rise in the Euro has been accomplished despite the absence of Asian central banks. Thus the unrest in the Mid-East appears to have Arabic money moving into Euro and Pound asset. s

Geo-Political/ In the Papers:
– Following last week’s approval to increase the retirement age, the Spanish government entered into a social pact with employers and unions. The Spanish Labor Minister Gomez and the country’s largest unions UGT, CCO and various other organizational leaders plan to go through large scale negotiation sessions, and planned economic overhauls this week to deal with economic and unemployment issues. Some of the changes are expected to be released during the week.
– According to the Financial Times, British inflation concerns have helped drive gilt yields to 8-month highs. So far in 2011, government debt has underperformed bonds of other western European governments. Some strategists state that the gilts may see a further sell off, as there are concerns that international investors will sell gilts due to inflation levels and concerns about sterling.
– As expected, the Irish government confirmed Friday, the 25th of February as date of General Election.

***Looking Ahead***
– (AR) Argentina Jan Government Tax Revenue (ARS) 38.7Be v $38.2B prior
– 6:00 (BR) Brazil Dec Industrial Production M/M: 0.9%e v -0.1% prior; Y/Y: 5.5%e v 5.3% prior
– 6:00 (IR) Ireland Jan Live Register Monthly Change: No est v L5.2K prior; Unemployment Rate: No est v 13.4%
– 6:30 (GE) German Government Briefing on EU Summit Objectives
– 7:00 (US) MBA Mortgage Applications w/e Jan 28th: No est v -12.9% prior
– 7:30 (US) Jan Challenger Job Cuts Y/Y: No est v -29.0% prior
– 8:15 (US) Jan ADP Employment Change: 140Ke v 297K prior
– 10:30 (US) Weekly DOE Energy Inventories : Crude: +3Me; Gasoline:+2Me; Distillate: -1.5Me; Utilization: 81.4%e
– 11:00 (US) Fed to Purchase $1.5-2.5B in Notes/Bonds
– 11:30 (EU) EU’s Fule, Turkey’s Yildiz, OMV Chief Speak in Brussels
– 14:15 (CA) Bank of Canada’s Macklem speaks in Calgary, Alberta
– 17:30 (US) Fed’s Duke speaks in North Carolina
– 20:00 (CH) China Jan Non-manufacturing PMI: No est v 56.5 prior

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February 1st, 2011 in Forex News

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