European Market Update: German ZEW suggest that recovery is fragile; Currency rhetoric picking up from all angles


ECONOMIC DATA

- (FI) Finland Sept Industrial Production M/M: -1.7% v 0.5%e ; Y/Y: -23.0% v -20.9%e

- (GE) German Oct Final CPI M/M: 0.1% v 0.1%e; Y/Y: 0.0% v 0.0%e

- (GE) German Oct Final CPI - EU Harmonized M/M: 0.1% v 0.2%e; Y/Y: -0.1% v 0.0%e

- (FR) France Sept Industrial Production M/M: -1.5% v 0.5%; Y/Y: -10.4% v -9.2%e

- (FR) France Sept Manufacturing Production M/M: -1.6% v 1.2%e; Y/Y: -11.0% v -10.5%e

- (SW) Sweden Sept Industrial Production M/M: 0.2% v 0.5%e; Y/Y: -15.7% v -19.7%e

- (SW) Sweden Sept Industrial Orders M/M: 0.7% v -4.2% prior; Y/Y: -12.1% v -18.1% prior

- (DE) Danish Oct CPI M/M: 0.0% v 0.2% prior; Y/Y: 1.0% v 0.8% prior

- (DE) Danish Oct CPI EU Harmonized M/M: 0.0% v 0.2% prior; Y/Y: 0.6% v 0.5% prior

- (IT) Italy Sept Industrial Production M/M: -5.3% v -4.0%e; Y/Y: -15.7% v -15.8%e; Industrial Production NSA Y/Y: -15.3% v -13.8%e

- (NO) Norway Oct CPI M/M: 0.2% v 0.0%e; Y/Y: 0.6% v 0.8%e

- (NO) Norway Oct CPI Underlying M/M: -0.1% v 0.1%e; Y/Y: 2.1% v 2.2%e

- (NO) Norway Oct Producer Prices M/M: 1.5% v -6.0% prior; Y/Y: -4.1% v -4.1%e

- (SA) South Africa Oct SACCI Business Confidence: 82.2 v 85.5 prior

- (UK) Sept Visible Trade Balance: -7.2B v -£6.1B; Trade Balance Non-EU: -3.8B v -£3.0B; Total Trade Balance: -3.5B v -£2.2B

- (UK) Sept DCLG House Prices Y/Y: -4.1% v -4.9%e

- (GE) German Nov ZEW Econ Sentiment: 51.1 v 55.0e; Current Situation: -65.6 v -70.0e

- (EU) Euro-Zone Nov ZEW Econ Sentiment: 51.8 v 58.0e

- (IR) Irish Sept Industrial Production M/M: % v -16.7% prior; Y/Y: % v -13.7% prior

- (SA) South Africa Sept Manufacturing production M/M: % v 0.8%e; Y/Y: % v -13.1%e


SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

- Equities: European markets have erratic morning session. Opening slightly positive, markets quickly slipped into the red on mixed earnings news and below expectations comments from Barclays [BARC.UK] regarding credit provisions and annualized loan losses. Market speculation that Qatar Holdings was in the process of placing 25M Volkswagen [VOW.GE] preference shares further accelerated downside sentiment. Negative sentiment was snapped at 3:15EST by HSBC's [HSBA.UK] interim management statement. Painting a differing picture from Barclays, HSBC noted that credit and provisioning levels were ytd ahead of expectations, specifically within its US operations (US banking/mortgage operations had carried the bulk of 2008 losses and writedowns). This release carried the financial sector higher, dragging all major European indexes out of negative territory. Equity markets trended higher, peaking at 4:15EST due to disappointing Norwegian and Italian data releases. November Euro-zone and German Zew survey's both missed their estimates at 5:00EST, sending markets rapidly back through the unchanged mark and into negative territory. Commentary from the Germany Zew regarding the status of recovery furthered this action. Lagging sectors on the EuroStoxx50 included Tech and Industrials, both of which led the downtrend following the Zew release. Trading volumes have been mixed with the FTSE100 printing ahead of averages and the DAX and CAC both trading below moving averages.

-In individual equities: HSBC [HSBA.UK] Provides Interim Management Statement: Q3 pretax "significantly" ahead y/y. || Barclays [BARC.UK] Reports 9 month Pretax £4.4B v £2.05B y/y, declares Interim dividend of 1p per share. || Vodafone [VOD.UK] Reports H1 Net £4.8B v £3.8Be, EBITDA £7.5B v £7.5Be, Rev £21.8B v £21.7Be. || VW [VOW.GE] Hearing Qatar Holdings preference shares being placed at €68.5-69.5. || Imperial Tobacco [IMT.UK] Reports FY09 adj Pretax £2.23B v £2.2B y/y, Rev £26.5B v £20.5B y/y. || Rheinmetall [RHM.GE] Reports Q3 Net -€64M v €13Me (unclear if comparable), Rev € v €851Me. || OMV [OMV.AS] Reports Q3 Net €283M v €250Me (after minorities), Rev € v €4.8Be; Refining margins continue to hurt profits. ||

- Speakers: Fitch commented that the UK was most at risk to lose its "AAA" sovereign status among major economies. The rating agency noted that Germany was least likely to lose its "AAA" rating. For Japan, a material rise in JGB issuance above ¥44T would prompt review of rating . Major economies need to articulate their fiscal plan next year. US rating would be pressured if US fiscal position did not stabilize, but no near-term risk to US sovereign rating seen at this time || China PBoC Vice Gov Ma reiterated quite competent to achieve the 8% GDP growth target in 2009. The central banker also reiterated the PBoC's accommodative monetary policy stance would continue. Capital inflows have caused imbalance in Balance of Payments and would take appropriate monetary steps based on economic outlook. The PBoC member noted that the central bank was watching inflationary expectations and also noted that he did not see substantial pressure for CNY to appreciate || Morgan Stanley's Roach commented that he saw the global economy growing by 2.5% over the next three to five years. He noted that the US consumer demand would to be slow for years to come and that China had an unbalanced economic structure || (RU) Russian Central Banker Shvetsov commented that excess liquidity in Nov- Dec period could lead to RUB weakness. He noted that further interest rate cuts would decrease RUB pressure. He warned against excessive carry-trade operations as RUB volatility likely to remain high || Dutch Finance Minister Bos commented that he has never been concerned about strong Euro noting that Europe has always wanted a strong Euro and now has one and should not complain || South African Econ Development Min Patel reiterated that the country has no plans to fix the Rand currency and added that a competitive currency was needed . Fixing Rand had not been considered. He did note that the Ministry would hold debate on Rand currency (ZAR) within two week and such a debate did not suggest that its policy would change || ZEW's Franz commented that the German economic recovery to proceed in "small steps || Zew Economists noted that they were uncertain how private consumption would evolve as uncertainty in labor markets and price increases might dampen consumption ||

- In Currencies: the GBP was broadly lower on the back of the Fitch initial comments about the potential for the UK to lose its "AAA" sovereign rating. GBP/USD slumped to test 1.6602 before rebounding back above the 1.67 handle as the NY morning approached. Pound was able retrace a large portion of its move after Fitch provided some clarification on its UK sovereign rating. Fitch noted that a lower rating UK would be the case should the British government opt for another fiscal stimulus package. Currently Fitch reiterated that the UK outlook was stable and expected fiscal consolidation.

. The EUR/USD approached the 1.4950 level as oil and gold stumbled a bit in late Asia. The USD saw a vast of its late Asian gains evaporate as persisting risk appetite underpinned the higher yielding, commodity and "risk" currencies.

- Fixed income: Gilt markets shrugged of a Fitch report which stated that the UK was the nation in most danger of losing its AAA credit rating. The DMO sold £3.75B in off the run 10y Gilts, and the results combined with weaker than expected trade balance data have to send Gilt prices higher across the curve with long end out-performace leading to a flatter yield curve. The Fitch report also stated that Germany was the least likely nation to lose its credit rating and as a result Bunds have outperformed both Treasuries and Gilts. A surprisingly weak reading in the Nov ZEW survey has also helped the 10y Bund yield move back below 3.30% for the first time in over a week. Ahead of the re-oepning, 10y notes hit an intra-seesion high yield above 3.50%, with the yield progressively declining as the session wore on, to sit at 3.455% at the time of writing. Three month Euribor fixed below the ECB base rate for the third successive session. In corporates, Fiat launched a 6y benchmark eurobond, with order books said to be in excess of €6B.

- In Energy: OPEC Head of Research Qabazard: Oil stocks now decreasing but will rise early part of 2010. Oil stocks are currently around 58 to 59 days of forward cover and noted that OPEC would increase output if oil stock declined to 52 to 53 days. Lastly he noted that member compliance was in range of 62-63% ||

- Geo-political: South and North Korean warships exchanged fire (first navel clash in seven years) off their western coast after the North's vessel crossed a disputed sea border and ignored several warning shots. Incident began after North Korean vessel ventured 1.3 kilometers into waters claimed by South Korea

- Credit Crunch: Swedish FSA stated that its domestic stress tests showed that none of four main banks (Nordea AB, Swedbank AB, SEB AB and Svenska Handelsbanken AB) could handle 'large loan losses' in the Baltic countries and would not need further capital to meet the minimum capital requirement. The FSA stated that the four largest banks would have total loan losses of SEK175B in the period between the fourth quarter of 2009 and the end of 2012.

- In the papers: UK Telegraph article noted that Europe's industry slams China over its currency and calls for urgent measures to cap the surging Euro. Business Europe commented that an overvalued euro was not good news for growth and was inconsistent with the commitments of the G20 countries for an orderly resolution of global imbalances. China has held the yuan fixed to the dollar despite its huge trade surplus through vast purchases of foreign bonds. This has allowed it to flood Europe with cheap exports, gaining market share on the coat-tails of dollar devaluation. Business Europe called on EU leaders to "push the message" in Beijing that China must let the yuan rise || WSJ article noted that World Bank Chief Economist Lin believed that the Yuan currency appreciation could weigh on global recovery, thus depressing US consumer demand for Chinese goods. || The UK Guardian ran an article that according to a IEA source the agency might have overestimated forecasts for global oil supplies . The article noted that in 2005, the IEA stated that oil supplies could rise to as much as 120M barrels per day by 2030. However, the IEA was forced to reduce its forecast to 116M and then 105M last year. The source says the 120M figure always was "nonsense", but today's number was much higher than can be justified. Many inside the IEA believe that maintaining oil supplies at even 90-95M bpd would be impossible, but there are fears that panic could spread on the financial markets if the projections were brought down further. Source noted that the US fears the end of oil supremacy because it would threaten their power over access to oil resources.


NOTES

- German investor sentiment declined by more than expected in November and at lowest since July

- The rhetoric is picking up on the currency front from all aspects on dollar, euro and Yuan.

- Russian Central Bank warns against excessive carry trade operations

- President Obama: Yuan currency issue will "come up" during talks with China; Currency valuation among the factors that have contributed to imbalances

- China Central Bank Vice Gov: External pressure on CNY appreciation "not huge"

- Risk appetite continue to aid equities; HSBC Q3 pretax "significantly" ahead y/y; Lloyds Banking might cut 4% of workforce


Looking Ahead:

- US Earnings season winding down but continue to trickle in with BZH and TYC expected before the opening bell this am

- (RU) Russia Sept Trade Balance: $10.0Bev $11.5B prior; Exports $26.9Be v $27.1B prior; Imports: 17.0Be v $15.6B prior

- 7:30 (US) Oct NFIB Small Business Optimism: No est v 88.8 prior

- 7:45 (US ICSC/UBSW Chain Store Sales

- 8:00 (PD) Sept Polish Trade Balance: -€500M v -€481M prior; Current Account: -€543M v -€69M prior

- 8:30 (EU) ECB's Wellink

- 8:55 (US) Weekly Redbook Retail Sales: No est v 0.9% prior

- 9:15 (US) Fed's Lockhart

- 10:00 (US) Nov IBD/TIPP Economic Optimism No est v 48.7 prior

- 10:05 (US) Fed's Yellen

- 11:15 (US) Fed's Rosengren