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European Market Update

Geopolitical Concerns Dominate as Data Runs Thins

Fri, Jul 11 2008, 12:20 GMT
by John J. Phillips IV

TradeTheNews.com

ECONOMIC DATA

• ·GE June Wholesale Price Index: M/M 0.9% v 0.9%e || Y/Y 8.9% v 8.9%e
• ·SP June CPI: M/M 0.6% v 0.6%e || Y/Y 5.0% v 5.0%e
• ·SP June Core CPI: M/M 0.2% v 0.2%e || Y/Y 3.3% v 3.4%e
• ·SP June Harmonized CPI: M/M 0. 6% v 0.6%e || Y/Y 5.1% v 5.1%e
• ·RU Russian Central Bank raised all lending rates by 25bps; Refi rates goes to 11.00%

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

·In sector rotation overnight Citigroup raised both the European insurance sector and the European oil & gas sector to overweight. Citigroup also cut the European personal and household goods sector to neutral, and cut the European construction sector to underweight. Elsewhere Morgan Stanley raised the European food producers to in-line. Finally, Lehman cut its price targets for Spanish banks by an average of 6% citing recession risk. Citigroup announced overnight that it will sell its German Retail Banking Operation to Credit Mutuel for €4.9B in cash. The transaction is expected to result in an estimated after-tax gain of $4B to Citi upon closing. After giving effect to the proposed sale, Citi's Tier 1 capital ratio would have increased by approximately 60bps Shinsei Bank confirms that it will purchase of GE's (GE) Japanese Consumer finance unit for ¥580B. Air Berlin [AB1.GE] and Thomas Cook [TCG.UK] agreed to terminate deal for Air Berlin to acquire Cook's Condor due to higher fuel costs. Thomas Cooke will continue negotiations with Air Berlin and plans to discuss alternative transactions.

·In the newspapers, according to the Financial Times Citigroup (C) is close to selling its German retail banking unit to Credit Mutual. The deal could be worth €3B-€5B. The Financial Times wrote overnight that the Federal Banking Commission of Switzerland plans to raise the capital requirements for UBS [UBSN.SZ] and Credit Suisse [CSGN.SZ]. Recall that there has been some speculation about this over the past few weeks. The New York Times reported overnight that that Anheuser-Busch (BUD) is actively seeking to enter into a friendly deal with InBev [INB.BE]. InBev may be willing to raise its bid to as high as $70/share v $65 prior, according to sources. According to La Tribune Dassault Aviations [AM.FR] seeks to acquire Alcatel's [ALU.FR] stake in Thales [HO.FR].

·In energy news, the Financial Times noted overnight that the US owners of London's oil futures exchange believe that attempts by US regulators to close a regulatory gap in the oversight of the UK's main energy futures market is unlikely to impact oil prices. According to Iraqi news network Nahrainnet, Israeli fighter jets may be using Iraq's airspace and US bases to prepare for an attack on Iranian nuclear plants. The report cites anonymous sources in Iraq's Defense Ministry as saying that Israeli jets have used air space in Jordan to land at US airbases in Iraq for the past month.

·On the fixed income front the Telegraph reported overnight that some senior UK bankers are expected to lobby the BoE to widen the terms of the special funding scheme. The bankers believe that the facility has not done enough to restore confidence among banks. The facility currently accepts triple-A rated securitized bonds backed by mortgages and credit card debt. According to the Financial Times the House Builders Association sees 12,000 or more job cuts by UK home builders over the next few months. The Wall Street Journal wrote overnight that a trade group for European money-market traders wants the BBA to increase the number of EU banks included in the panel that submits quotes for dollar-Libor borrowing rates.

·In the currencies press reports were getting the attention overnight.The USD was off its recent lows after press reports surfaced that the Bush administration was looking at a potential government takeover of Fannie Mae or Freddie Mac. The EUR/USD was trading around 1.5785 and the USD/JPY around 107.15. Oil is firmer as Iraqi news network Nahrainnet stated that, Israeli fighter jets may be using Iraq's airspace and US bases to prepare for an attack on Iranian nuclear plants. NYMEX Aug crude contract moved back above the $144 handle. The soft tone in CHF has been attributed to reports that the Federal Banking Commission of Switzerland plans to raise the capital requirements for Swiss banks.

NOTES

·All was quiet overnight due to a lack of central bank/European official speakers, as well as a lack of exciting data. The European indices were firmer at the open, buoyed by reports that the US government was studying the potential takeover of Fannie Mae or Freddie Mac, but later declined on the back of a sharp rise in oil prices following further developments/speculation on the geopolitical situation between Iran and Israel. There have been some discussions amongst the dealing desks overnight over whether or not a government takeover of Fannie or Freddie would lead S&P to downgrade the rating on US sovereign debt. If a downgrade were to occur foreign investors limited to making investments in triple A rated debt would have to seek alternative investment plans, leading investors away from the Dollar. At the same time dealers are questioning where exactly investors would place their money considering that no one really has the capacity to absorb the amount of investment that the US has. Although only time can tell it is well worth thinking about.

·Looking ahead, Canadian unemployment data is due out at 7:00 ET this morning. Analysts are looking for an unemployment rate of 6.1%, and a net change in employment of +8.0K. In the states the trade balance, import price index, University of Michigan confidence, and monthly budget statement are all scheduled throughout the day. On the earnings front Dow component General Electric (GE) (2.0% of the Dow) is due to report ahead of the open; consensus estimates are for earnings of $0.54 on revenue of $45. 31B.

Published on  Fri, Jul 11 2008, 12:24 GMT

Archive

• French Sentiment Data Loewst in Over Five Years
  Published On Mon, Aug 18 2008, 13:23 GMT
• Commodites slides as USD continues to recover
  Published On Fri, Aug 15 2008, 12:18 GMT
• Inflation hawks remain on front burner
  Published On Mon, Aug 11 2008, 12:54 GMT
• Let the Games Begin!
  Published On Fri, Aug 8 2008, 10:49 GMT
• Markets Quiet as Rate Decisions are on the Horizon
  Published On Thu, Aug 7 2008, 13:43 GMT

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