European Market Update: USD finds it hard to be loved; Gold hits fresh all-time highs near $1,1170/oz; Stocks aided by rising risk appetite


ECONOMIC DATA

- (HU) Hungary Sept Retail Trade Y/Y: -7.3% v -6.8%e

- (TT) Taiwan Oct Industrial Production Y/Y: 6.6% v 5.6%e; Export Orders Y/Y: 4.4% v 4.0%e

- (TT) Taiwan Oct Unemployment rate: 6.0% v 6.1%e

- (FR) France Nov PMI Manufacturing: 54.2 v 56.0e; PMI Services: 60.4 v 57.8e

- (SZ) Swiss Oct Money supply M3 Y/Y: 7.7% v 7.7% prior

- (GE) Germany Nov Advanced PMI Manufacturing: 52.0 v 51.6e; PMI Services: 51.5 v 51.2e

- (IC) Iceland Oct Wage Index M/M: 0.3% v 0.3% prior; Y/Y: 1.9% v 1.9% prior

- (EU) EU Nov Advanced PMI Manufacturing: 51.0 v 51.2e; PMI Services: 53.2v 52.9e; PMI Composite: 53.7 v 53.4e


SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

- Equities: European markets have entered the abbreviated US week on a light tone. Rebounding from last week's equity declines, markets have been supported across the board by the 'global recovery' story and new multi-year and all time highs in commodity prices. Corporate news, much like trading volumes have been thin with a relatively quiet weekend and pre-market session. Lloyds [LLOY.UK] announced the completion of the first stage in its multi-stage capital raise plan and Heritage Oil [HOIL.UK] confirmed sale of certain Ugandan license stakes to Italian firm ENI [ENI.IT]. Following commodity rises, basic resources and heavy industrial names have been the outstanding players throughout the session.

-In individual equities: Lloyds [LLOY.UK] Provides results of US and Non-US debt exchange offers. || Heritage oil [HOIL.UK] Confirms intent to sell Ugandan assets for up to $1.5B; may pay special dividend. || RBS [RBS.UK] Considering placing up to 7B of toxic assets into Irish NAMA fund -Times. || BMW [BMW.GE] Planning to offer hybrid versions of 3 and 5 series models -WirtschaftsWoche. || Deutsche Telkom [DTE.GE] UK's Office of Fair Trading to no longer make Orange/T-Mobile merger face a competition probe - London Independent. ||

- Speakers: IMF's Strauss Khan noted that it was better to exit stimulus measures later than earlier. Plans for consolidation in fiscal operations should be top priority. IMF was looking at financial industry tax ||ECB's Ordonez reiterated ECB rhetoric that the economic recovery path remained uncertain and the exact timing of stimulus exit was unclear. The current interest rate of 1.0% was appropriate. Premature withdrawal of stimulus could undermine progress made thus far; while too late an exodus might undermine future growth. Euro-Zone Inflation would turn positive in coming months. He noted that ECB was not talking about raising interest rates at this time although the market seemed to be pricing in a rate hike in H2 2010 ||Indonesian regulatory agency: Concerned about potential asset bubbles but such risk not prevalent at this time | Chinese banking regulator CBRC denied press speculation that it might impose lending controls nor increase bank capital adequacy requirement to 13% and added that it sought to avoid year end volatility in lending. The regulator noted that it would set outbound investment limits on some banks. It also informed banks to meet 150% loan-loss coverage by end 2009 and control pace of loan growth||

- Currencies: The week began with the USD sentiment dangling on a thread with Dovish weekend Fed speak cited as the initial catalyst. Chicago Fed President Evans noted in a FT interview that US unemployment would likely peak at around 10.5% and adding that prevailing policy settings would remain for some time yet, possibly into 2011. Fed's Bullard commented that he supported asset buying beyond Q1 2010 and a potential interest rate hike depended on incoming economic data. Dealers noting that year-end cyclical factors for the Euro also aidinh a weaker dollar sentiment. Dealers keenly pointed out that the EUR/USD had finished the last few weeks of the trading year on firmer territory in at least 7 of the last 9 year ends this decade.

The dealers also continued to expand upon comments from Fed's Bullard last week that history suggest that he USD should not start rising on a sustained basis until 12 months after the Fed starts to lift rates. Last week Bullard noted that in the last two recession the Fed waited 2.5 to 3 years to begins its tighten once a recovery commenced. The weaker dollar also fueled commodity prices higher with dealers noting the source of the buying interest was a combination of speculative interest and options hedging ahead of ta large $1200 option expiration. Spot gold tested $1,168/oz during the European morning. The USD was off around 100 pips against the major European pairs with EUR/USD again approaching the 1.50 level.

- Fixed Income: The German yield curve has been subject to a bout of flattening this morning following perceived hawkish statements from Trichet on Friday, and after the ECB made tentative measures towards enacting an exit strategy. Slight amendments to collateral requirements may seem trivial but the 2y Schatz yield is up 4bps on the day at 1.365% while the 5y Bobl is under even more pressure, up 5bps and above 2.40%. US and UK yield curves have been subject to bear steepening, with Gilts and Treasuries weaker across the curve but long dated issues underperforming. In corporates, UBS is reportedly planning 10y covered bonds denominated in Euros.

- In Energy: OPEC Sec Gen Badri commented that a watchdog needed to be created to monitor excess levels of speculation in the energy market as again OPEC believes that speculation behind the recent rise in oil prices. ||Heritage Oil [HOIL.UK] Confirmed intent to sell Ugandan assets for up to $1.5B ||

-Geo-political: Iran testing an air defense system to assess its ability to protect its nuclear plants in military exercises

-In the papers: FT: The volume of activity in sovereign credit default swaps have doubled in the past year because of concerns over government indebtedness. CDS volumes for Italy are now the highest for an individual country, while gains have been noted for U.S., U.K. and Japan. In contrast, outstanding volume linked to emerging nations such as Russia, Brazil and Ukraine have been flat or fell in the last year.


Notes:

- NY Post: Jamie Diamond mentioned as a possible replacement for Tsy sec Geithner

- National Association of Business Economists (NABE) Oct Poll: Raises US 2010 GDP forecast to 2.9% from 2.6% prior

- H1N1 deaths doubling every 2 weeks in Europe.

- Dealer noting that T Bill yields hit Zero for first time in 70 years. On a historical note, tast time bill yields were so low was 1939 when coincidentally stocks began a 3 year 34% decline.

- USD finding it hard to be loved; Gold at fresh all-time highs near $1,170/oz; Silver approaching $19/oz


Looking Ahead:

-( SP) Spain Sept Trade Balance (-4.5B)

- 8:00 (HU) Hungary Central Bank Rate Decision: Consensus expectations for a 5-bps cut to 6.50%

- 8:00 (BR) Brazil Oct Tax Collections (BRL)" 65.9Be v 51.5B prior

- 8:30 (US) Oct Chicago Fed National Activity Index: No estimate versus -0.81 prior

- 8:30 (CA) Canada Sept Retail Sales M/M: 0.6%e v 0.8% prior; Y/Y: 0.4%e v 0.5% prior

- 10:00 (US) Oct Existing Home Sales: 5.70Me v 5.57M prior

- 10:30 (IS) Israel Central bank Interest Rate decision: No change expected from the 0.75% current level

- 15:30 (MX) Mexico Sept Retail Sales: -3.5%e v -5.5% prior

- TBA (CO) Colombia Central bank interest rate decision: No change expected from the 4.00% current Overnight lending level