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European Market Update

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BOE Befuddled; European Carmakers' Earnings Take a Bow

Wed, Jul 23 2008, 12:32 GMT
by John J. Phillips IV

TradeTheNews.com

ECONOMIC DATA

• ·FR June Consumer Spending: M/M -0.4% v -0.6%e || Prior revised from 2.0% to 1.7% |||| Y/Y 1.0% v 1.4%e || Prior revised from 3.1% to 2.8%
• ·SP June Producer Prices: M/M 1.1% v 0.6%e || Y/Y 9.0 % v 8. 4%e
  
• ·IT May Retail Sales: M/M 0.2% v -0.1%e || Prior revised from 0. 0% to 0.1% |||| Y/Y 0.5% v -0.5%e
  
• ·UK BOE Minutes: BOE voted 7-1-1 to hold rates at 5.00% at the July 10th meeting
  
• ·UK June 21,118K v 27,499K prior || Prior revised to 27,499K from 27,968
  
• ·EU May Industrial New Orders: M/M -3.5% v -1.3%e || Prior revised from 2.5% to 2. 0% |||| Y/Y -4.4% v 2.1%e || Prior revised from 11.7% to 12.3%
  
• ·IC June Wage Index: M/M 1.2% v 0.4%e || Y/Y 8.5% v 7.8%e

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

·In equity news overnight, and heed my warning that there is quite a bit, Julius Baer [BAER. SZ] reported its 1H Net at CHF510M, above the CHF488M estimate. Operating income was CHF1.6B, roughly in line with the CHF1.65B estimate, while return on equity rose to 28.8% from 27.9% a year ago. Assets under management were CHF364B, shy of the CHF380B estimate. CEO Johannes De Gier announced that he will be stepping down. Merck KGAA [MRK.GE] reported Q2 revenue of €1.9B, in line with the €1.89B forecast, and net income of €207. 5M, just shy of the €209.3M forecast. Merck said that it is on track to meet its FY08 guidance. Sale of Serono, which accounted for approximately 30% of the company's revenue in 2007, rose by 8.3% y/y. Norwegian telecom giant Telenor [TEL.NO] reported Q2 revenue of NOK23.9B, in line with the NOK24B estimate, and EBITDA of NOK7.2B, below the NOK7.5B forecast. Pretax was in line with consensus estimates at NOK5.2B. Telenor cut its FY08 revenue growth forecast to 3% from 5%, and maintained its FY08 EBITDA margin target of over 31%. Peugeot [UG.FR] reported 1H revenue of €31.2B, in line with the €31.6B estimate, and net income of €733M, above estimates of €674M. Peugeot reaffirmed its FY08 guidance. Volvo [VOLVB.SW] reported Q2 revenue of SEK80.2B, shy of the SEK82.2B estimate, and net income of SEK5.13B, just below estimates of SEK5.21B. Volvo reported pretax of SEK7. 48B, above estimates of SEK7.2B. The company forecasted 10% y/y growth in the European truck market, and a 5%-10% y/y decline in the European construction equipment market. Vodafone [VOD.UK] announced a £1.0B share buyback overnight, representing 1.5% of the company's market cap. Vodafone cited the decline in share prices following yesterday's guidance, noting that share prices are significantly undervalued. Koninklijke KPN [KPN.NV] reported Q2 revenue of €3.66B, in line with the €3.61B estimate, and net income of €353M, below estimates of €380M. EBITDA was in line with the €1. 27B forecast, while EBIT was €656M, just shy of the €689M forecast. Costco (COST) added $1.0B to its share repurchase program overnight representing 3. 2% of its market cap. The company said that it sees Q4 earnings “well below” the current consensus of $1.00 as a result of inflation, with particularly negative affects resulting from higher energy prices. The company added that it believes that its growth outlook remains positive. Tokio Marine [8766.JP] announced overnight a deal to acquire Philadelphia Consolidated (PHLY) for $61.50/share in a deal valued at $4.7B. The offer represents a 72.9% premium to yesterday's closing price. Volkswagen [VOW. GE] reported 1H net income of €2.57B, above the €2.2B estimate, and revenue of €56.5B, above the €55.9B estimate. Operating profit rose to €3.48B, above estimates of €3.2B. The company said that is sees FY08 deliveries above last year's levels, and expected operating profit to post a y/y rise.

·In the newspapers the Wall Street Journal assessed Wachovia's (WB) outlook in the Heard on the Street column. The article noted that Wachovia's Q2 earnings report may suggest that the company can earn enough money in the upcoming quarters to offset its mortgage losses. The WSJ cited the expectations that Wachovia won't need to raise additional dilutive capital as the catalyst for its share price gain following its earning report. The WSJ questioned Wachovia's pledge that it won't need to raise more capital because problems will weigh on the bank for several more quarters. The article raised concerns about Wachovia's exposure to adjustable-rate mortgages because house prices are falling and these types of loans are now more difficult to refinance. According to La Tribune Renault [RNO.FR] plans to close its Sandouville plant in August due to weak sales of the Laguna family car.

·In currencies the USD continued to strengthen assisted by lower commodity prices and technical factors. The EUR/USD was last around 1.5730, lower by 50 pips, while the USD/JPY pair held above its 200-day moving average of 106.99, aided by M&A flow. The EUR/JPY made fresh all-time highs of 169.97, but was unable to knock out the alleged option barrier at 170-level yet again. Dealers noted that the changing technical picture could perhaps bring a new phase to overall USD sentiment, particularly if crude stays below the $132 level. Dealers noted the price action in several emerging market currencies that could propel a new USD trend. The EUR/CZK cross was up 2.78% in trading on Tuesday, and was poised to move higher today. Tuesday's move was the largest one-day move in this pair's history. The GBP was slightly firmer as the BOE minutes showed a bipolar MPC emerging as the debate between growth and inflation continues.

·In new supply overnight Germany sold €3.21B in 4.75% July 2040 buxl with an average yield of 4.91% and a bid-to-cover of 1.2x. The cover compares to the 2.1x seen at the January top-up auction. In Portugal the Instituto de Gestão da Tesouraria e do Crédito Público sold €1. 0B in 4.375% June 2014 bonds with a bid-to-cover of 1.8x and an average price of 97.07. There was some chatter amongst the dealing desks overnight that big accounts are beginning to favor bunds over gilts following the BOE minutes as market participants seems to believe that a BOE hike is more likely than an ECB hike over the next couple of months.

·On the speaker front the ECB's Liebscher said overnight that he expects relatively healthy economic growth, noting that an interest rate hike will not impede growth. Liebscher added that Euro Zone citizens will not accept lax monetary policy and reiterated that the EBC is committed to price stability. The Bank of England minutes from the July 10th policy-setting meeting showed a 7-1-1 vote. Dissenting member Blanchflower voted for a 25bps rate cut arguing that he expects a sharp drop in economic activity over the next several quarters. Dissenting member Beasley voted for a 25bps rate hike arguing that the BOE must control inflation expectations, and ensure its credibility. The BOE majority said that a rate hike could create an inflation undershoot, and would have surprised markets, but noted that any rate move could be better communicated in August. The majority also said that keeping rates at 5.00% was a signal of determination.

NOTES

·The European indices opened higher in the session lifted by a series of positive earnings reports ahead of the open including Peugeot, and Koninklijke KPN, and were aided by Volkswagen and Fiat earnings during the early trading hours. Regarding the economic data overnight, the Y/Y reading on Spanish producer prices was the highest since February of 1985 as record high energy prices increased costs for manufacturers. Although we have seen oil prices come off from recent all time highs the data once again highlights one of the problems plaguing the afflicted Spanish economy. The Bank of England minutes were both exciting and frightening. The befuddled monetary policy committee voted 7-1-1 in favor of holding rates at 5.00% at the July 10th policy-setting meeting. Dissenting member Blachflower voted for a 25bps rate cut as many had expected, while dissenter Beasley voted for a 25bps rate hike. Most notably the BOE said in the minutes that a rate move could be better communicated in August. The BOE also said that CPI is likely to be higher than was forecasted in May, but noted that a raising rates risks undershooting CPI. The initial market interpretation lends to the believe that perhaps the BOE will consider raising interest rates at the August 7th policy-setting meeting in an attempt to defend the British economy from deteriorating under the hands of an inflationary assault, but, as usual, this view has also been met with skepticism. Looking ahead, earnings results will dominate the US morning again as the sole economic release due in the US today, the Fed's Beige Book, is scheduled for release in the afternoon hours. Amongst the giants expected today are Dow components Boeing (BA), AT&T (T), Pfizer (PFE), and McDolands (MCD), as well as sluggers Phiilip Morris (PM), Wellpoint (WLP), Wyeth (WYE), Arrow Electronics (ARW), Conocphillips (COP), General Dynamics (GD), and Pepsico (PEP).

• ·“--- ----“ - Charlie Chaplin, Mabel at the Wheel (1914)

Published on  Wed, Jul 23 2008, 12:36 GMT