European Market Update: European markets steady following German election results; GBP and JPY price action calms down in Europe


ECONOMIC DATA

- (FI) Finland Sep Consumer Confidence: 11.7 9.0e; Business Confidence: -17.0 v -25.0 prior

- (HU) Hungarian Aug Unemployment Rate: 9.9% v 9.9%e

- (SP) Spanish Jul Mortgages on Houses: -19.1% v -10.8% prior, Mortgages on Capital Loaned: -26.2% v -16.1% prior

- (IT) Italian Consumer Confidence: 113.6 v 112.0e

- (TT) Taiwan Aug Leading Index M/M: 1.9% v 2.3% prior, Coincident Index: 0.6% v 2.7% prior

- (GE) German Sep CPI - Saxony M/M: -0.3% v 0.1% prior , Y/Y: -0.3% v -0.1% prior

- (GE) German Sep CPI-Hesse M/M: -0.5% v 0.3% prior, Y/Y: -0.8% v -0.3% prior

- GE) German Sep CPI-Brandenburg M/M: -0.3% v 0.1% prior, Y/Y: -0.4v -0.2% prior

- (IC) Iceland Sept CPI: M/M; 0.8% v 0.5% prior; Y/Y: 10.8% v 10.9% prior

- (GE) German CPI-North Rhine Westphalia M/M: -0.3% v 0.3% prior, Y/Y: -0.3% v 0.0% prior


SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

- In equities news overnight: European bourses entered the week on a profoundly mixed note following a decidedly negative trading session out of Asia (Indian equity markets are closed for a public holiday). The mixed European picture was a result of a surprisingly clear electoral picture in Germany following Federal elections. With the CDU and CSU pulling a combined 33.8% of the vote, the way appears cleared for current Chancellor Merkel to form a new government with the FDP, shedding the SPD from the 'Grand Coalition.' With this victory, German equities opened positive, with strength in the large blue chip names in the industrial, financial and energy sector. The FTSE and CAC40 opened to the downside prior to a brief rally into positive territory. Overall trading ranges have remained tight. For UK listed names, banks and miners have led the lower momentum with EU regulatory issues hanging over Lloyds [LLOY.UK] and RBS [RBS.UK]. Earnings out of home building supplier Woseley [WOS.UK], despite reading lower than expectations, did not come in as low as some expectations had called for and traded higher. The CAC40 was weighed lower on the back of technology names including Technip [TEC.FR] and the automotive sector. Through 5:30EST, equity markets have remained split as the DAX remains in positive territory, shaking off disappointing CPI's and the CAC and FTSE remain slightly negative. Volumes on the DAX and FTSE are well ahead of moving averages on strong investor interest.

-In individual equities: Cadbury [CBRY.UK] Kraft preparing improved £11B hostile bid for firm (prior £10.2B) -Observer.
New Kraft bid could be as high ast 850p/share with approx 50% to be paid in cash, 50% to be paid in new Kraft stock. || Woseley [WOS.UK] Reports prelim FY Pretax (ex items) £293M v Profit £228Me, Rev £14.4B v £15.5Be. || Solvay [SOLB.BE] SOLB.BE: Confirms sale of drug unit to Abbot for €4.5B. || Crucell [CRXL.NV] Forms Collaboration with Johnson & Johnson for Study of Therapies for Influenza Prevention and Treatment; JNJ Affiliate to take €301.8M Equity Stake in Firm. || Lloyds [LLOY.UK] The EU may require the company to sell part of its retail and corporate operations - FT. || BBVA [BBV.SP] Confirms selling property to Deutsche Bank worth €1.15B. Will sell apporx 948 branches via leaseback deal. || Bayer [BAY.GE] Swiss regulators are probing contraceptive Yaz. || Unicredit [UCG.IT] Reportedly, looking to raise €4B in a stock sale (9.1% of market cap). ||

- Speakers: IMF stated that the current UK fiscal situation was worrying and the next UK Gov't should establish fiscal credibility very quickly. The IMF official commented that there could be a slight upward revision to UK growth forecast and noted that the current GBP currency rates were consistent with economic rebalancing and that it was around levels that resembled fundamentals. Despite concerns over fiscal situation, UK monetary and fiscal policy needs to remain accommodative for the time being ||

- In Currencies: The European morning saw a retracement of the pre- Tokyo price movements in the GBP and JPY pairs.
Japan's Finance Minister Fuji readjusted FX rhetoric to note that the Ministry was watching the price movement carefully after USD/JPY pair tested the 88.22 level in Sydney. USD/JPY tested 89.65 as dealers took note of a 90 option strike that is due to expire at the London cut. The GBP rebounded from its Sydney lows of 1.5770 as a Times article tried to clarify the BOE stand on the pound currency. The article cited BoE sources saying Governor King is not trying to talk down GBP but was an attempt to explain the fall in sterling that had already occurred since 2007 and was not a suggestion that it should fall further. GBP/USD tested above the 1.5900 after hitting a low of 1.5770 in Sydney.

- EUR/USD continues to be heavily influenced by equity prices and vice-versa and is at 1.4640 as the NY morning approaches, down around 70 pips from its opening levels in Asia.

-In Fixed Income: Government bonds have started the week on a strong footing in European trading. Bunds are modestly bid across the curve despite election results in Germany that were supposed to be a strong positive for equity markets.
Bund futures are higher by 7 ticks in thin volumes with the 10y cash yield just below 3.25%. Reaction to sequential declines in German state CPI's was similarly muted. The UK yield curve is a touch flatter with short dated yields slightly higher despite revelations that BoE Governor King met with Swedish Riksbank officials last week. The Swedish Central Bank being the only monetary authority thus far to have adopted negative deposit rates. 2-year Gilts are yielding 0.75% whilst short sterling futures are up ticks. Italy sold €1.1B in 2023 linkers with a bid-to-cover of 1.6 times.

- In Energy: Saudi Oil Minister Ali Naimi reiterated his view that oil prices are stabilizing around $75/bb and that OPEC was unlikely to need to adjust production quotas at the next meeting in Dec in order to keep prices between $70-80/bbl . he did not rule out another spike in prices and stated that the world was "on the road to economic recovery" ||Mexico's PEMEX [MX] placed its August crude production at 2.54M bpd v 2.76M bpd y/y. August exports at 1.1M bpd b 1.4M bpd y/y || Concerns over weak US energy demand resurfacing in the session following Friday's US durable goods data showed orders. Nymex Nov crude futures was off over 40 cents trading at 65.60 area ahead of the NY morning on Monday.

- In the papers: Times article cites BOE sources saying Governor King was not trying to talk down GBP currency and that FX market participants have misinterpreted his recent comments. The Times sources said that the bulletin comment was an attempt to explain the fall in sterling that had already occurred since 2007 and was not a suggestion that it should fall further.

- Geo-political;" Reportedly as part of ongoing war games/missile tests, Iran has launched medium range missile. Test firing of its Shahab-3 missile, which has a range of up to 2K kilometers as part of military maneuvers


NOTES

- German Chancellor Merkel survives recession; coalition's mandate was not strong

- World Bank President Zoellick said the US should not take for granted the dollar's status as the world's main currency

- Time's article downplaying of BOE King's negative sterling comments

- Nikkei 225 Index hit hard by the decisive move by the JPY through the 90.00 line.


Looking Ahead

- 8:00 (HU) Hungarian Central bank Interest Rate Decision: 50bps cut to 7.50% expected from the current Base Rate of 8.00%

- 8:30 (US) Chicago Fed Aug National Activity Index: No estimates v -0.74 prior

- 10:30 (US) Dallas Fed Sept Manufacturing Activity: -4.0%e v -9.1% prior

- (GE) German Sep CPI- Baden Wuerttemburg M/M: No estimates v 0.4% prior, Y/Y: No estimates v 0.1% prior

- (GE) German Sept Prelim CPI M/M: -0.2%e v 0.2% prior, Y/Y: -0.1%e v 0.0% prior,

- (GE) German Sept CPI EU- Harmonized M/M: -0.2%e v 0.3% prior, Y/Y: -0.2%e v -0.1% prior

- 15:30 (MX) Mexico July Global Economic indicator: -7.2% expected versus -8.1% prior