European Market Update: BOE Minutes confirms a third rate hawk on MPC

***Economic Data***
– (FR) France Jan Consumer Price Index M/M: -0.2% v -0.1%e; Y/Y: 1.8% v 2.0%e
– (FR) France Jan CPI EU Harmonized M/M: -0.2% v -0.1%e; Y/Y: 1.9% v 2.2%e; CPI Ex Tobacco Index: 120.3 v 120.6e
– (HU) Hungary Dec Retail Trade Y/Y: -1.7% v +0.3%e
– (SP) Spain Dec Mortgages-capital loaned Y/Y: -31.5% v -26.1% prior; Mortgages on Houses Y/Y: -17.0% v -14.6% prior
– (TT) Taiwan Jan Commercial Sales Y/Y: 13.1% v 7.9%e; Industrial Production Y/Y: 17.2% v 17.8%e
– (SZ) Swiss Jan Producer & Import Prices M/M: 0.1% v 0.1%e; Y/Y: 0.0% v 0.0%e
– (NV) Netherlands Dec Consumer Spending Y/Y: 1.0% v 2.8% prior
– (MA) Malaysia Jan CPI Y/Y: 2.4% v 2.4%e
– (NO) Norway Dec AKU Unemployment Rate: 3.4% v 3.6%e
– (PD) Poland Jan Retail Sales M/M: -28.6% v -26.2%e; Y/Y: 5.8% v 8.5%e
– (PD) Poland Jan Unemployment Rate: 12.9% v 13.0%e
– (IT) Italy Jan Final CPI (NIC incl. tobacco) M/M: 0.4% v 0.4%e; Y/Y: 2.1% v 2.1%e
– (IT) Italy Jan Final EU Harmonized M/M: -1.6% v -1.2%e; Y/Y: 1.9% v 2.4%e
– (UK) Bank of England Minutes: MPC voted 5-3-1 to maintain interest rates and asset purchase target unchanged at 0.50% and £200M respectively
– (UK) Jan BBA Loans for House Purchase: 28.9K v 29.3Ke
– (EU) Euro Zone Dec Industrial New Orders M/M: +2.1% v -1.0%e; Y/Y: 18.5% v 16.2%e

Fixed Income
– (GE) Germany sold €5.64B in new Mar 1.5% 2013 Schatz; Avg Yield 1.53% v 1.17% prior; Bid-to-cover: 1.8x v 2.1x prior
– (EU) ECB allotted $70M in 7-Day USD Liquidity Tender
– (IT) Italy Debt Agency (Tesoro) 6-month Bill & Zero Coupon Note Results
– Sold €9.0B in 6-month Bills; Avg Yield 1.307% v 1.421% prior; Bid-to-cover: 1.56x v 1.82x prior
– Sold €2.5B in zero 2012 CTZ; Avg Yield 2.550%
– (SW) Sweden sold SEK2.0B in 2022 Bonds; Avg Yield 3.401%
– (EU) ECB allotted €39.8B vs. €71.1B prior in 3-Month Tender (MRO)

*** SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM ***
***Notes/Observations:
– Libyan chaos threatens to spark oil crisis; Oil tested 2.5 year highs
– China’s drought areas are likely to receive rain this week – Chinese Press
– Bank of England registers a newly minted hawk

Equities:
FTSE 100 -0.60% at 5960, DAX -0.45% at 7284, CAC 40 -0.10% at 4045, IBEX 35 -0.05% at 10,693, FTSE MIB +0.30% at 22,058, SMI +0.30% at 6644

– European shares continue to trade in the red over fears that mounting unrest in Libya will lead the country’s powers to halt oil exports. Despite reassuring statements from OPEC, traders worry over contagion risks in the region. As expected by the markets, BoE turned more hawkish as a Dale joined Sentance and Weale for an increase in rates. What markets did not expect, was that Sentence called for a 50bps hike instead of a 25bps. ECB has also followed suit and adopted a more hawkish tone at least as evidenced by rhetoric. Tech stocks were lower due to HP’s disappointing outlook but banks were higher in the session.
– French banks were the best performers led by Natixis [KN.FR], once the ugly duckling among its French peers, which reported a lower net profit due to an exceptional gain that boosted last year’s net. Net earnings however beat expectations. Core revenue had also increased by 20% and the company announced it would resume its dividend. Unconcerned by Basel III rules, the bank said its Tier1 ratio would increase to 8% without the need for a capital issue. Shares rose about 4% and continue to rally. Barclays [BARC.UK] also rose about 1.5% in the session after a Judge ruled that Lehman Brothers sale of most of its operations to Barclays during the financial crisis was legal albeit “imperfect”. Commerzbank [CBK.GE], the embattled German bank forced to tap Germany’s Soffin rescue fund during the global financial crisis, reported a profit for the fourth consecutive quarter after last year’s loss. Results beat expectations and bankxpected to close FY11 with a profit. Bank also vowed to repay the silent participations of the German government for 2011. Shares opened up by 1% but turned lower as markets absorbed the news. Indeed, everything is relative and the initial rally may have benefitted from tremendously low expectations. Second, the bank, which purchased shares in late 2010, while reassuring that it would pay its dues, left unanswered the question which haunts investors: is another capital hike in order?
– Danish shipping company, Moller-Maersk [MAERSKB.DE] is trading up by over 2% after reporting a record 2010 performance which beat estimates. The results were sustained by higher freight rates and volumes in its container activities, reduced costs and higher oil price. The shipping markets returned to life in 2010 after a terrible 2009 but company said that it is unlikely that these stellar results would be repeated in 2011.

Speakers:
– Bank of England Minutes: MPC voted 5-3-1 to maintain interest rates and asset purchase target unchanged at 0.50% and £200M respectively in Feb. The minutes showed that members Dale and Weale voted for 25bps BPS hike, while Sentance raised his request to a 50bps hike. Most members agreed that medium term inflation risks had risen and the case for withdrawing stimulus had strengthened. Members who opposed rate hike saw greater inflation risk want to see if Q4 GDP decline sustained. They noted that Q4 GDP weakness could be temporary or early signal of worsening outlook for growth. High inflation could persist due to commodity prices or accommodative monetary policy in emerging markets.
– France PM Sarkozy’s Diplomatic Advisor: International community not considering military intervention in Libya; European needs to consider sanctions against Libya
– ECB’s Quaden commented that the central bank sought to guarantee purchasing power in Europe with the overall goal of assuring price stability
– Saudi King returns home after 3-month medical leave. Announces increase in the social security budget by SAR1B and to make cost of living allowance permanent
– India Trade Ministry report noted that a widening trade deficit could lead to unsustainable Current Account deficit and potentially towards payment difficulty

Currencies/Fixed income
– The FX price action continued to be determined by interest rate factors rather than geo-political concerns. European interest rate hawks were setting the early tone in Europe, with both the euro and GBP pushing ahead against the USD, JPY and JPY pairs despite the general uncertainty surrounding the Middle East. One dealer observed that th e USD had lost any risk trade pull it once had as interest rate sensitivities dominate. The BOE minutes validating market rumors of a freshly minted hawk as member Dale joined Sentence and Weale in calls for the BOE to raise rates. GBP/USD tested 1.6274 in the aftermath of the BOE minutes. The EUR/USD hovering around the 1.37 handle as the NY morning approached.
– Overall uncertainty in the Middle East region was tempering speculative activity.
– On the interest rate front the market current pricing 50% chance of a 25bp BoE interest rate hike in April and almost a 90% chance of such a move in May.

Geo-Political/ In the Papers:
– In the Middle East, the headlines out of Libya were dominated by reports that the country’s leader had declared force majeure on its oil products exports. Recall, Libya exports about 1M bpd of crude, and the country has the largest proven oil reserves in Africa. In other news out of Libya, on yesterday’s session, the country’s leader Gaddafi vowed that he would not back down from power and Italy’s Foreign Minister was quoted as saying that estimates of 1,000 fatalities in Libya are believable. As worries increase that the geopolitical concerns could eventually spread to Saudi Arabia, the Saudi King disclosed that his government would increase social spending. King Abdullah announced reforms, including plans to increase the social security budget and raised assistance measures for unemployed individuals. In Yemen, it was reported that 7 lawmakers resigned from the ruling party over concerns about how anti-government protestors are being treated. A separate report disclosed that the first deaths among protestors in Yemen were reported on Tuesday. The London Telegraph’s Ambrose Evans-Pritchard looked at the situation in Bahrain and quoted a Barclays analyst who believes that the unrest in the country is a greater threat to the oil market and the strategic balance in the Middle East than Libya.
– In European press news, the London Independent reported that the cabin crew of British Airways is planning to hold a new strike ballot in March. US financial report reports noted that Barclays received a favorable court ruling related to the UK firm’s previously announced acquisition of some of the assets of Lehman Brothers. Following yesterday’s trading problem, which impacted the Italian equities market, it was reported in the London Telegraph that the London Stock Exchange will face an official probe related to the matter. On yesterday’s session, Italian equities were halted for 6 hours due to a problem related to real-time price data.

***Looking Ahead***
– 6:00 (CZ) Czech Republic to sell CZK8.0B in New Fixed Rate Bonds
– 6:00 (BR) Brazil Feb FGV Construction Costs M/M:% v 0.4%e v 0.4% prior
– 6:00 (IR) Ireland Dec Trade Balance (First Estimate): € v €4.1B prior
– 7:00 (US) MBA Mortgage Applications w/e Feb 18th: No est v -9.5% prior
– 7:45 (US) ICSC Chain Store Sales
– 8:30 (BR) Brazil Jan Current Account: -$5.6Be v -$3.5B prior; Foreign Direct Investment (FDI): $2.0Be v $15.4Be
– 8:55 (US) Redbook Retails sales
– 9:00 (MX) Mexico Dec Retail Sales: 52.8%e v 2.4% prior
– 10:00 (US) Jan Existing Home Sales: 5.22Me v 5.28M prior
– 11:00 (US) Fed to purchase $1.5-2.5B in Notes/Bonds
– 11:30 (US) Treasury to sell 4-Week Bills
– 12:00 (EU) ECB Trichet and member Quaden speak in Liege, Belgium
– 12:15 (EU) ECB Weber speaks at Zurich University
– 12:30 (US) Kansas City Fed’s Hoenig speaks on Economy
– 13:00 (US) Treasury to sell $35B in 5-Year Notes
– 13:30 (BR) Brazil Jan Tax Collections (BRL): 80.0Be v 90.9B prior
– 13:30 (US) Fed’s Plosser speaks on Economic Outlook in Alabama
– 13:30 (GE) German Bundestag holds Annual Media conference
– 14:00 (AR) Argentina Jan Trade Balance: No est v $241M prior
– 14:00 (AR) Argentina Jan Industrial Production M/M: No est v 5.6% prior; Y/Y: No est v 10.6% prior
– 16:00 (SK) South Korea Feb Consumer Confidence: No est v 108 prior
– 16:30 (US) API Weekly Energy Inventories

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February 21st, 2011 in Forex News

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