European Market Update: S&P Sovereign Head: expects most AAA countries to withstand turmoil - Does not expect defaults or break-up scenario within Euro Zone; Sterling slips after largest annual UK GDP contraction since 1980


ECONOMIC DATA

- (TH) Thailand Central bank cuts its Benchmark interest Rate by 50bps to 1.50%; as expected

- (GE) German Dec Real Construction Orders NSA Y/Y: -11.8%

- (GE) German Q4 Final GDP Q/Q: -2.1% v -2.1%e; Y/Y: -1.7% v -1.7%e; NSA Y/Y:-1.6% v -1.6%e

- (GE) Q4 Final Imports: -3.6% v -1.4%e; Exports: -7.3% v -5.4%e

- (SP) Spanish Jan Producer Prices M/M: 0.4% v -0.1%e; Y/Y: -0.6% v-1.6%e

- (CZ) Czech Feb Consumer Confidence: -27.5 v -25.8 prior; Business Confidence: -12.8 v -9.2 prior; Consumer & Business confidence: -15.8 v -12.5 prior

- (SW) Swedish Feb Economic Tendency Survey: 72.0 v 71.7e; Consumer Confidence: -14.6 v -16.9e; Manufacturing Confidence: -35 v -36e

- (IT) Italian Dec Retail Sales M/M: 0.0% v 0.0%e; Y/Y: -1.9% v -1.7%e; 2008 Full year avg adj retail sales Y/Y: -0.6% (largest annual decline since 1997 when series began)

- (NO) Norwegian Dec Unemployment Rate (AKU): 3.0% v 3.1%e

- (UK) Q4 Preliminary GDP Q/Q: -1.5% v -1.6%e; Y/Y: -1.9% v -1.9%e; largest annual decline since 1980

- (UK) Dec Index of Services 3M/3M: -0.9% v -1.0%e

- (SA) South African Jan CPI M/M:0.4% v -0.3%e; Y/Y: 8.1% v 7.5%e


SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

- In equities, Cadbury [CBRY.UK] reported a 2008 net profit of £364M, below forecasts for £390M. It missed on revenues as well, making £5.4B compared to expectations for £5.76B. Its 2008 organic sales growth came in at 7%. Cadbury guided 2009 revenue at the low end of +4% to +6% range. Its FY08 Underlying Margin was 150 Basis Points higher and expected good progress on FY09 to improvements in margin goals. It did note that it saw 2009 input costs rising by 6% to 8%. Overall the company noted that it had good growth across all categories and is well positioned but not immune from the weak economy. || Logica [LOG.UK] reported a FY08 adjusted operating profit of £267M, above estimates. Revenues were £3.59B, slightly above the £3.51B forecasts. It expected its first half revenue would be in line with 2008 on a constant currency basis. Adjusted operating margin was 7.5%, in line with guidance. The company remains confident of its ability to outperform the IT services market in 2009. || Accor [AC.FR] reported a FY08 net profit of €575M, below consensus estimates. Its operating profit came in at €875M also missing estimates. Revenues were €7.74B, in line with forecasts. The company offered no outlook for FY09, citing the difficult macro environment. It did note that its EBITAR margin increased by 100bps to 29.6%. || Telekom Austria [TKA.AS] reported a Q4 net loss of €437.7M, slightly above the expected loss of €481M. Revenues were €1.31B, in line with estimates. It guided FY09 EBITDA and revenues in line with consensus estimates. || La tribune reported that Air France [AF.FR] is studying a possible Czech Airlines privatization, in which the Czech government hoped to raise about €176M by selling its 92% stake. || Henkel [HEN3.GE] reported a Q4 net adjusted profit of €249M, beating estimates. Its revenues were €3.54B, slightly below the €3.63B consensus. It left its dividend unchanged at €0.53/share. Its 2008 organic growth was 3% and guided 2009 organic sales as outperforming the market. || Barratt [BDEV.UK] reported a H1 pretax loss £80.0M versus a profit £201.8M y/y. Revenues were £1.26B compared to a single analyst estimate of £966.0M. The company's H1 completion came in at 6,905 compared to 9, 056 y/y. The average selling price declined to £160.7K from £178.0K y/y, reflecting a significant increase in the level of discounting, particularly in the last quarter, but also changes in site and product mix. Its operating margin was 1.3% versus 16.6% y/y. || Tomkins [TOMK.UK] reported a FY08 operating profit of $328.4M, in line with $338.2M estimates. Revenues were $5.52B, slightly above the consensus view. It slashed its final dividend to $0.1302/share from $0.2768/share. The company also noted that it is considering closing 15 plants, including four in Europe, in a move that could affect around 2.5K employees. || ISAE lowerd Italy's 2009 GDP forecast to -2.5% v +0.2% prior view

- In speakers, the ECB's Ordonez said that the Spanish economy was going through a sensitive period and noted that he expects the recession to be significant. According to Ordonez, private sector credit rose 6% y/y in Spain in January but growth was distorted by use of old credit lines. He added that Spanish credit was slowing faster than rest of the EU. || The ECB's Weber noted that the situation in money markets remains tight and warned against hasty moves on regulation among member states. Weber insisted that central banks have to discuss a liquidity exit strategy and that the lack of confidence remained the main problem in financial markets, while also stating that there are no alternatives to government stimulus packages. In Weber's viewe, the ECB's role as a central counterparty in money markets cannot continue in the long run, although the crisis requires a wide range of state interventions in markets due to the fact that self-healing is insufficient. || The German debt agency noted that Germany is seeing strong demand for short-dated debt and could avoid issuing linkers if there is no taxpayer benefit. The rising bond supply situation does not risk a funding shortfall according to the agency, which pledged to focus on short-term debt if borrowing needs increase. || Sweden's Riksbank released its most recent policy decision minutes, which shows that members voted unanimously for the 100 bps rate cut at its Feb 11th meeting. The bank noted that the economic downturn has turned out to be worse than previous thought back in December, with an unusually high amount of uncertainty in the air currently. The Riksbanks pointed to the Baltic countries as the source of this uncertainty. It also commented that the weaker krona would lessen the decline in economic growth and that CPI would fall very quickly in 2009. It foresees demand recovery when the financial system is back in order, adding that fiscal measures being taken around the world would help ensure economic recovery. || S&P's sovereign ratings chief commented that the world remains in a powerful downturn and stated that he expects most AAA-rated countries to withstand the economic turmoil. He does not expect defaults within the Euro Zone and does not foresee any break-up scenario. He added that markets have the ability to absorb increased debt issuances.|| The BoJ's Shirakawa said Japan needs to be careful that bank capital requirements do not harm the overall economic cycle.

- In currencies, the USD/JPY pair tested above the 97 handle in earlier Europe before consolidating. Dealers noticed that recent JPY weakness over the past few session might be attributed to over-hedged Japanese exporters who sold JPY. Earlier in Asia Japan's Jan exports fell by almost 50% y/y with record slides in shipments to the United States, Europe and the rest of Asia pointing to a deepening recession across much of the world. The WSJ's "Heard on the Street" column discussed that the yen's status as a haven currency is declining. And that a shift is a turnaround could be the start of bad news for yen bulls. The article noted that according to an industry group, foreign assets held by Japanese investment trusts have fallen by $118B in the past year. It noted the break down in the correlation between the rising yen and falling stocks. Despite the weaker equities and rise in the VIX index, the yen has fallen to a 12 week low against the dollar. The article comments on Japan's weakening economy and lack of credible political leadership. || The GBP saw its earlier gains erode following the UK GDP data for Q4. The 1.9% contraction was the largest annual decline since 1980. GBP/USD fell by over 100 pips post data to test 1.4475 ahead of the NY morning. The pair was testing 1.46 level during the Asian session. Overall dealers noting that price action was dominated by cross-currents.

- In fixed income, a steepening bias has returned to Bunds, Gilts and USTs, with traders buying short-dated issues and selling the rest of the curve in all three markets. In Germany the 2-yr/10-yr yield spread is back above 175bps, with the yield on the 10-yr Bund comfortably above 3.00%. In the UK, the 2-yr/10-yr spread is inching back towards 200bps, and in UST's the 2-yr/10-yr spread is testing 180bps. Euro Zone peripheral government bonds have seen modest improvements, with risk appetite returning in other asset classes. Yield spreads versus Bunds in the Greek 10-yr are back below 240bps, and in the Austrian 10-yr are back below 120bps. Ahead of the Treasury's $32B 5-yr note auction, the current Jan 2014s have been steady in Asian and European trade, with the yield pretty much unchanged from closing New York levels at 1.88%. || The German Finance Ministry said it would need to borrow €323B in 2009, versus €213B in 2008. The ministry noted that the flight to liquidity has helped Bund sales. || The French debt chief said he expected 2009 borrowing to reach €330B, compared to €270B prior year. It saw almost a zero risk of default among Euro Zone member states.

- In energy, Iran stated that the construction stage of the Bushehr nuclear power plant has been completed and the plant has moved to a pre-commissioning stage. Iran noted that the Bushehr tests would use virtual fuel, not real nuclear fuel (Lead is used instead of nuclear fuel). **Reminder: Russia started deliveries of nuclear fuel for the plant in late 2007. Washington and Moscow noted that such deliveries have removed any need for Iran to have its own uranium enrichment program.
Moscow stated that Iran would return all spent fuel rods to Russia. || Gazprom [GAZP.RU] Seeking to sign gas exploration contract with Nigeria by March, 2009. The firm is actively seeking to expand operations in Africa, has targeted Algeria, Egypt, Libya and Nigeria


NOTES

- Equity markets remained positive into the NY morning. Traders noting that Bernanke's testimony yesterday was well received and President's Obama speech to Congress did no harm. || European officials continue to express opinions that one cannot imagine a potential Euro-Zone breakup. S&P Sovereign head echoed that sentiment and expected most AAA countries to withstand turmoil and did not expect defaults or break-up scenario within Euro Zone. || Iran noted its Bushehr nuclear power plant test has begun but will only use 'virtual' fuel during its testing phase. || Japan saw a record drop in exports and one of the factors in the recent JPY weakness as the country's exporters were overhedged on their currency positions (thus demand to sell JPY). || UBS Erroneously placed a ¥3 Trillion Yen Order after system error (okyo Stock Exchange's ToSTNeT system canceled the trade at no cost to co.)

- Looking Ahead: Bernanke again today before the House

- 7:00 (US) MBA Mortgage Applications w/e Feb 20th : No expectations v 45.7% prior

-10 :00 (US) Jan Existing Home Sales: 4.79M expected v 4.74M prior; M/M: 1.1% expected v 6.5% prior

- 10:00 (US) Fed Chairman Bernanke testifies before US House

- (PD) Polish Base Rate Announcement: 25bps cut to 4.00% expected; the current Base Rate is 4.25%

- 1:00 (US) Treasury to sell $32B 5y Notes