Italy PM Letta appears poised to win confidence

EU Market Update: Italy PM Letta appears poised to win confidence as members from Berlusconi group defect; No surprises expected from ECB rate decision today

Notes/Observations

- President Obama reiterated no negotiation over debt ceiling and urged Republicans to reopen US govt

-US Treasury Sec Lew: now using the final extraordinary debt measures; reiterates measures will not last beyond Oct 17th

- Australia Aug Trade Balance registers its second straight deficit (-A$815M vs. -A$400Me)

- Asia Development Bank (ADB) cuts Asia GDP growth forecasts for 2013 and 2014 (China, India and Developing countries in region)

- Italy PM Letta appears poised to win confidence as members from Berlusconi group defect

- No surprises expected from ECB rate decision today

Economic Data

- (HU) Hungary July Final Trade Balance: €448.2M v €421.6M prelim

- (ES) Spain Sept Net Unemployment M/M: +25.6K v +35Ke, first rise in 7 months

- (EU) ECB €25M borrowed in overnight loan facility vs. €689M prior; €52.7B parked in deposit facility vs. €66.9B prior - Daily Eurosystem Liquidity Conditions

- (BR) Brazil Sept FIPE CPI: 0.3% v 0.3%e

- (UK) Sept PMI Construction: 58.9 v 59.5e; 5th straight month in expansion territory

- (IS) Iceland Central Bank (Sedlabanki) leaves 7-day Lending Rate unchanged at 6.00%, as expected

Fixed Income:

- None seen

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities:

- Indices [Stoxx50 -0.80%, FTSE 100 -0.90% at 6,403, DAX -0.60% at 8,639, CAC-40 -0.80% at 4,162, IBEX-35 -0.40% at 9,305, FTSE MIB +0.90% at 18,142, SMI -1% at 7,972, S&P -0.70% at 1,677 ]

- Market Focal Points: UK retail earnings, Italy FTSE MIB outperforms amid confidence vote, Weaker commodity prices weigh on miners, Portugal Telecom rises on M&A, Upcoming ECB decision, Continuing US government shutdown, US ADP employment change data, Fed speakers during US session (Bernanke, Rosengren, Bullard)

By Sector

- Consumer Discretionary [Tesco TSCO.UK -4% (H1 profits below ests), Lufthansa LHA.DE -3.5% (broker commentary), Air Berlin AB1.DE -3.4% (broker commentary), Sainsbury SBRY.UK -2.5% (H1 sales); Domino's Pizza DOM.UK +1.5% (reaffirmed outlook)]

- Technology [Wolfson Microelectronics WLF.UK -12% (cautious outlook)] - Healthcare [Acino ACIN.CH +31% (takeover offer)]

- Industrials [BMW BMW.DE -1% (slowdown in Sept US sales); Gerresheimer GXI.DE +2% (reaffirmed outlook)]

- Basic Materials/Resources [K+S SDF.DE -2% (mining accident), Fresnillo FRES.UK -0.50% (broker commentary)]

- Telecom [Portugal Telecom PTC.PT +15% (merger)]

- EuroStoxx50 Sectors [Consumer Cyclical -1.2%, Consumer Non-Cyclical -1.2%, Utilities -1%, Industrials -0.80%, Energy -0.80%, Financials -0.70%, Basic Materials -0.60%, Telecom -0.50%]

Speakers:

- Italy PM Letta addressed his Senate and urged politicians to cease the moment and called for a confidence vote to take place after his speech and replies. He noted that the country ran a potentially fatal risk

- taly center-right Senator Formigoni: 25 PDL Senators ready to form new conservative group (break from Berlusconi) and vote for Letta in a confidence vote (enough to give Letta a Senate majority)

- German Fin Ministry: Germany sees nearly balanced budget in 2013 with budget deficit seen at 0.2% of GDP

- Fitch: Fiscal risk persist in Japan despite consumption tax hike

Currencies/Fixed Income:

- The initial focus in today's session was on Italy political situation and speculation that the Senate might hold a confidence vote. PM Letta currently has a comfortable majority in the Lower House (Chamber of Deputies). In the Senate he has 137 votes from his own Democratic Party (PD) and would need at least 24 extra to secure the 161-seat majority. The outcome seem assured for Letta as members from Berlusconi group defect to 'save face'. The Italian 10-year gov t yields was lower by 5bps at 4.36% ahead of the NY morning.

- ECB's policy outcome to digest today due to tomorrow's holiday in Germany as well the situation of the US political arena in regards to any resolution of the partial govt shutdown. The EUR/USD was steady and holding above the 1.35 handle.

- The USD/JPY pair tested a 1-month low below 97.40 during the session after the Nikkei225 Index slumped over 2%

Political/In the Papers:

-(IT) Italy Center right party indicated that as many as 40 senators will support Letta

-(IT) Moderate PdL member reportedly states that most PdL members want to support the Letta government in a confidence vote

-(IT) Former member of the 5 Star party movement said to support Italy PM Letta in a confidence vote - press

- (EU) ESM's Regling: ESM has enough intervention capacity for Italy or Spain - press; 90% of ESM intervention capacity is unused

- (GR) IMF Chief Lagarde: IMF remains comm.

-(ES) EU's Rehn: There is a good chance Spain can most likely wrap up its financial assistance program for banks without requiring another successor program

- (ES) Bank of Spain Dep Gov Restoy: Spain must keep up its reform efforts; backing off now would be destructiveitted to helping Greece; there have been productive discussions with the Greece PM

-(US) Fitch: US debt ceiling is not itself a downgrade trigger, but a formal ratings review with potentially negative implications would be triggered if govt does not raise debt ceiling in a timely manner

-(US) US Treasury triggered the last available measures to avoid debt limit; Restates measures will be exhausted by Oct 17th; Measures incl debt swap with Federal financing bank, civil service retirement and disability fund.

-(US) Senate Majority Leader Reid (D-NV): Democrats open to discussions on long term fiscal situation and spending bills for the FY14; Boehner's request for budget discussions are not genuine; Democrats are prepared to enter budget discussions after the Govt reopens

-(CN) Asia Development Bank (ADB) lowers China 2013 GDP forecast to 7.6% from 8.2% prior; Lowers China 2014 GDP forecast to 7.4% from 8.0% prior

- (JP) Japan 10-yr govt Bond yields decline to 0.645%; Lowest levels since early May

Looking Ahead

All times listed for economic events are denominated in Eastern Standard Time (Add 4 hours for GMT equivalent)

- (IT) Italy PM Letta addresses Lower House (Chamber of Deputies); potential Italy confidence vote cold follow

- (EU) EU Commissioner Rehn with France Fin Min Moscovici in Paris

- (PL) Poland Central Bank (NBP) Interest Rate Decision: Expected to leave Base Rate unchanged at 2.50%

- (CL) Chile Central Bank Meeting Minutes

- 05:30 (DE) Germany to sell €5.0B in 2% 2023 Bunds

- 05:30 (EU) EU President Van Rompuy in Brussels with Lithuania's Leader Speak at Friends of Europe

- 06:00 (IE) Ireland Sept Live Register Monthly Change: No est v -3.4K prior; Unemployment Rate: No est v 13.4% prior

- 06:00 (UK) PM Cameron addresses U.K. Conservative Conference

- 06:45 (US) Daily Libor Fixing

- 07:00 (FI) Finland Fin Min Urpilainen in Helsinki

- 07:00 (US) MBA Mortgage Applications w/e Sept 27th: No est v 5.5% prior

- 07:45 (EU) ECB Interest Rate Decision: Expected to leave both its Main Refi Rate and Deposit Facility Rate unchanged at 0.50% and 0.00% respectively

- 08:00 (BR) Brazil Aug Industrial Production M/M: +0.2%e v -2.0% prior; Y/Y: -0.6%e v +2.0% prior

- 08:15 (US) Sept ADP Employment Change: +180Ke v +176K prior

- 08:30 (EU) ECB'S Draghi holds Press Conference After Rate Decision

- 09:00 IMF issues Global Financial Stability Report (GFSR)

- 09:30 (SG) Singapore Sept Purchasing Managers Index: 50.7e v 50.5 prior; Electronics Sector Index: 51.2e v 51.3 prior

- 09:45 (US) Sept ISM New York: No est v 60.5 prior

- 10:00 (DK) Denmark Sept Foreign Reserves (DKK): No est v 491.8 prior

- 10:00 (PL) Poland Central Bank Gov Belka to hold post rate decision press conference

- 10:30 (US) DOE Weekly Crude Oil Inventories

- 11:00 (US) Fed to buy $3.0-4.0B in bonds

- 11:30 (BR) Brazil Sept Commodity Price Index M/M: No est v 3.8% prior; Y/Y: No est v 5.4% prior

- 11:30 (US) Treasury to sell 4-Week Bills

- 11:30 (BR) Brazil Central Bank weekly currency flow data

- 12:00 (US) Fed's Rosengren (FOMC voter) in Vermont

- 13:00 (DE) German Fin Min Schaeuble in Paris on German reunification

- 15:20 (US) Fed's Bullard (dovish, FOMC voter) in St Louis

- 15:30 (US) Fed Chairman Bernanke speaks on Community Banks in St. Louis

- 21:00 (CH) China Sept Non-manufacturing PMI: No est v 53.9 prior