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European Market Update

Market Sentiment Shaky in the Wake of Poor Earnings Results

Tue, Jul 22 2008, 13:18 GMT
by John J. Phillips IV

TradeTheNews.com

ECONOMIC DATA

• ·SZ June Trade Balance: CHF2.41B v CHF1. 6Be
• ·IT July Consumer Confidence: 95.8 v 99.0e || Prior revised from 100.0 to 99.9
• ·IT June Trade Balance Non-EU: -€2.33B v -€1.77B prior



SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

·In equity news overnight Norskhydro [NHY.NO] reported their Q2 Net at NOK786M, below estimates of NOK1.4B, and EBIT of NOK708M, below estimates of NOK1.76B. Revenue of NOK23.9B was slightly better than the NOK22.64B estimate. The company said that the decline in Q2 results was due to rising input costs Ericsson [ERICB.SW] reported Q2 Net at SEK1.90B, below estimates of SEK3.03B, and operating profit of SEK4.7B, better than estimates of SEK3.91B. Revenue was SEK48.5B roughly in line with the SEK48. 14B estimate. The company reported its Q2 gross margin at 37%, down from 43% a year ago. Ericsson said that the weaker dollar hurt margins and sales as did restructuring charges of SEK1.8B. Vodafone [VOD.UK] reported Q1 revenue of £9.8B in line with estimates of £9.81Be. Vodafone guided its FY09 revenue toward the lower end of the £39.8B-£40.7B range citing economic weakness; the current market consensus is £39.9Be. Vodafone noted that it will continue to benefit from positive FX rates. Paragon Group [PAG. UK] received an approach overnight, noting that talks in "exploratory" phase. Note that Blackrock (BLK) holds 10% of Paragon. Great Portland Estates [GPOR.UK] reported NAV/share -16.2% y/y, and end of June property valuation -4.0% q/q. The company cited yield movements for the decline in portfolio value, and said that it sees downward pressure on London property.

·In the newspapers, according to the Wall Street Journal Ford (F) plans to offer buyout plans to its hourly workers at more than 12 additional plants in Michigan and Ohio. The buyouts will be offered as of next week and employees at 14 plants will have until October to decide if they will accept the package. Ford is also planning another set of buyout offers in the middle of August to workers at other plants and these buyouts will expire in November. The Wall Street Journal noted overnight that acceptances for HBOS' [HBOS.UK] £4B rights issue is now 37.83%. The Wall Street Journal reported overnight that bank examiners from the Fed and the Office of the Comptroller of Currency are examining the books of the US GSEs The books of Fannie (FNM) and Freddie (FRE) are reportedly being looked at to assess the financial condition of the two companies. Boerzen- Zeitung wrote overnight that bids for TUI's [TUI1.GE] Hapag-Lloyd unit were below book value.

·There was little to report on the energy front overnight. According to Shanghai Securities News China plans to raise its oil product reserves in order to ensure its emergency supplies. The reserve increase will target the Yunnan and Sichuan provinces. The article notes that in May, the Chinese government released some of its oil reserves to help ensure supplies following the Sichuan earthquake.

·On the speaker front the ECB's Bini Smaghi reiterated overnight that the ECB's objective is to keep inflation below 2.0%. Bini Smaghi noted that, excluding energy, inflation is less than 2.0%, and said that the Euro economy seen recovering after Q4. The ECB's Liebscher said that inflation development is a cause for concern, adding that the financial turmoil nearing the lowest point in Europe, noting that it is unclear when it will improve.

·In currencies the USD was mildly softer during the European session. Poor earnings and guidance from financial and tech names after yesterday's close weighed upon Dollar sentiment overnight. The debate over inflationary outlook and growth continue to jockey for the underlining theme in FX. The softer USD helped to maintain firmer commodity prices as both oil and gold held a positive tone throughout the session. The EUR/USD held above the 1.59 level as it attempted to break free of its 1-week 100 pip trading range. The USD/JPY was softer despite the Cabinet's lower GDP outlook for 2008. Waning Japanese growth has taken some upward momentum out of crude oil as dealers suggested that some 'demand destruction' may be beginning to unfold. The EUR/JPY was softer on technical factors as well with 170 option barrier chatter circulating.




NOTES

·With a lack of any top tier economic data scheduled overnight focus fell upon a couple of negative news items released post-closed in the US, and pre-open in Europe. In the US weak earnings results from American Express (AXP), lower guidance from Apple (AAPL), lower guidance from Texas Instruments (TXN), and lower guidance from Sandisk (SNDK) were amongst the notable news that had European market participants out of bed early this morning. Ahead of the European equity open less than favorable earnings results from Ericsson [ERICB.SW], an unfavorable revenue projection from Vodafone [VOD.UK], and weak earnings results from Nordea [NDA.SW] prompted the European bourses for a decline. Earnings will remain key during the US pre-market as the first piece of economic data in the US is due at 10:00 ET today. Earnings results are due form Dow components Catapillar (CAT), and Ei Du Pont (DD), as well as notables Freeport Mcmoran Copper (FCX), Halliburton (HAL), US Airways (LCC), Lockheed Martin (LMT), Supervalu (SVU), UAL Corp. (UAUA), United Health (UNH), United Parcel Service (UPS), and Wachovia (WB). All else was relatively quiet overnight, however comments from the ECB's Liebscher are worth pointing out again. Liebscher reiterated his concern about the current level of inflation in the Euro-Zone. Coupled with hawkish comments from the ECB's Wellink last week the more recent ECB rhetoric raises the question once again: is the ECB done raising rates? Despite this fixed income futures were higher overnight on the back of equity weakness and general concern as a number of key US and European earnings will be released over the next few days.

• ·“Old age is the most unexpected of all things that happen to a man” - Leon Trotsky

Published on  Tue, Jul 22 2008, 13:22 GMT

Archive

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• Commodites slides as USD continues to recover
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• Inflation hawks remain on front burner
  Published On Mon, Aug 11 2008, 12:54 GMT
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