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European Market Update

Euro Sinks as IFO Falls Below Expectations

Wed, Aug 27 2008, 07:02 GMT
by John J. Phillips IV

TradeTheNews.com

ECONOMIC DATA

• GE Q2 Final GDP Q/Q: -0.5% v -0.5%e || Prior revised from 1.5% to 1.3%
• GE Q2 Final GDP Y/Y 1.7% v 1.7%e
• GE Q2 Final GDP Y/Y nsa: 3.1% v 3. 1%e
• GE Q2 Final Private Consumption: -0.7% v -0.4%e || Prior revised from 0.3% to -0.4%
• GE Q2 Final Government Spending: 0.3% v 0.3%e || Prior revised from 1.3% to 1.1%
• GE Q2 Final Capital Investment: -1.9% v -1.5%e || Prior revised from 3.7% to 3.4%
• GE Q2 Final Construction Investment: -3.5% v -4.0%e || Prior revised from 4.5% to 5.7%
• GE Q2 Final Domestic Demand: -1.0% v -1.3%e || Prior revised from 1.9% to 1.6%
• GE Q2 Final Imports: -1.3% v -3.0%e || Prior revised from 3.5% to 3.2%
• GE Q2 Final Exports: -0.2% v -1.0%e || Prior revised from 2.4% to 2.1%
• GE Sep GfK Consumer Confidence: 1.5 v 2.0e || Prior revised from 2.1 to 1.9
• FR July Housing Starts: -11. 8% v -26.0%e
• FR July Housing Permits: -16.6% v -15.3% prior
• SW July PPI: M/M 0.7% v 0.5%e || Y/Y 3.3% v 3.1%e
• GE Aug IFO Business Climate: 94.8 v 97.2e
• GE Aug IFO Current Assessment: 103.2 v 104.4e
• GE Aug IFO Expectations: 87.0 v 90. 5e
• SZ July UBS Consumption Indicator: 1.848 v 2.218 prior || Prior revised from 2.246 to 2.218
• UK July BBA Loans for Home Purchase: 22, 448 v 22,369 prior || Prior revised from 21,118 to 22,369

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

In equity news overnight Rio Tinto [RIO.UK] reported 1H underlying profit of $5.5B, above the $5.15B consensus, and revenue of $27.2B, well above the $20.7B consensus. RIO noted that demand in China and India continues to grow, while US and European demand has slowed down. Wood Group [WG.UK] reported 1H net income of $120.4M, up from the $81.2M a year ago, pretax of $181.3M, up from $124M a year ago, EBITDA of $208M up from $144.6M, and revenue of $2.52B, up from $2.12B. The company said that they see FY08 results ahead of expectations. Bovis Homes Group [BVS.UK] reported 1H pretax of £11.7M, down from £58.4M a year ago, and revenue of £149.3M, down from £259.9M a year ago. Gross margins for the 1H declined to 26.3% from 32.6% a year ago. Bovis noted that no land write-downs required as at 30 June 2008. Norske Skogindustrier [NSG.NO] announced an agreement to sell its Korean Unit to private equity firms for NOK3.1B (about $575M). Infineon [IFX.GE] reaffirmed their Q4 earnings outlook in a presentation overnight. The outlook is for ex-items EBIT to either remain stable or to post a slight decline, and fore revenue to grow in the mid single-digit percentage range sequentially.

·In the newspapers Les Echos reported that Societe Television Francaise 1 [TFI.FR] is studying the sale of its audio-visual unit, noting that the company has hired Rothschild to help study the single unit sale. According to Die Welt employees of CommerzBank [CBK.GE] warned of possible merger-related job cuts. In a related article Frankfuter Allgemeine Zeitung speculated that Commerzbank may swap its Cominvest asset management unit with Allianz [ALV.GE] to pay for Dresdner. Il Sole 24 Ore wrote overnight that potential investors have pledged to inject €1.0B into Alitalia [AZA.IT].

·On the macro front, according to S&P the UK delinquency index for nonconforming residential mortgage-backed securities rose to 23.31% in Q2 from 22.17% in Q1. The reading is the highest since the index began in 2004. The CBI reported overnight that in the 3 months to August, UK service sector firms' profitability came under increased pressure. The difference between companies saying their level of business in value terms was above normal and those saying that it was below normal fell to -42 from -17 in May. The balance for the level of business in volume terms fell to -40 from -12, while the balance for overall profitability fell to -25 from -2. An analyst Societe General analyst cut the 2009 growth forecast for the UK to 0.5% from 1.2%, adding that the UK is likely to enter a mild recession in Q3 of 2008.

·In new supply overnight Italy sold €2.0B in zero-coupon CTZ with an average yield of 4. 174% and a bid-to-cover of 1.73x. The Greek PDMA sold €1.92B in July 2018 bonds with an average yield of 4.79% and a bid to cover of 2.51x.

·On the speaker front overnight the Danish Finance Ministry forecasted 2008 GDP growth at 1.1% and 2009 GDP growth of 0.5%. The ministry forecasted 2008 unemployment of 1.7% and 2.2% in 2009,, and wage growth of 4.7% in 2008 and 4.6% in 2009. Finally the ministry forecasted harmonized inflation of 3.8% in 2008 and 2.6% in 2009. Following the release of the IFO survey the IFO's Nerb said that he does not see the risk of the recession, adding that he sees a growing chance for the ECB to lower interest rates. Nerb added that the impact of the declining Euro and lower oil prices have not yet impacted all German companies. Nerb added that the real economy is isolated from the credit crunch, and reiterated that it is difficult to see if the worst is behind. The IFO's Abberger said that the German economy is losing speed significantly, adding that business export expectations clearly worse. Abberger asserted that Germany faces no "real recession" risk, but said that he cannot rule out technical recession. Abberger said that the current environment does not allow for an ECB rate hike nor and ECB rate cut, and added that he does not see a recovery in consumption.

·*** NOTES ***

·As one might have expected the focus overnight fell upon the German IFO survey for the month of August. All readings fell below consensus expectations, which in turn led to a sharp rise in the European fixed income futures, a solid decline in the EUR/USD, a narrowing of the 2-year note/schatz spread, and a drop in front month crude. Fixed income futures rallied from negative territory following the data release aided by comments from the IFO's Nerb who said that he sees a growing chance for an ECB rate cut. Consequentially the 2-year spread narrowed to around 163bps before rebounding; this was a notable decline from the opening spread of 172bps. The USD/EUR broke below the 1.46- handle ever so briefly, and failed to stage a full recovery as it hovered just above the 1.46-handle for quite some time thereafter. Finally, and to a lesser degree, the data helped to take crude oil lower on the slower growth = demand destruction theory. While the IFO survey was the main focus overnight the final reading on second quarter GDP was also of note early on. The final readings on GDP were in line with consensus estimates, however the prior q/q reading of 1.5% was revised down to 1.3%. With the above in mind focus seems to be shifting towards growth (ie. away from inflation), which could play a large role in central bank meetings in the coming months.

·“A pessimist is one who makes difficulties of his opportunities and an optimist is one who makes opportunities of his difficulties.” - Harry S. Truman

Published on  Wed, Aug 27 2008, 07:04 GMT