Risk appetite firms on potential policy measures by the ECB to limit contagion from the Greek crisis

ECONOMIC DATA

- (GE) Germany Trade Balance: €13.5B v€15.0Be; Current Account: €20.6B v €19.1Be; Exports M/M: 3.0% v -0.1%e;Imports M/M: 4.5% v 3.0%e

- (GE) Germany Jan Final CPI M/M: -0.6% v -0.6%e; Y/Y: 0.8% v 0.8%e

- (GE) Germany Jan Final CPI EU Harmonized M/M: -0.6% v -0.7%e; Y/Y: 0.8% v 0.7%e

- (FI) Finland Dec Preliminary Trade Balance: -€50M v €250Me

- (HU) Hungary Dec Preliminary Trade Balance: €375M v €271Me

- (CZ) Czech Jan CPI M/M: 1.2% v 1.5%e; Y/Y: 0.7% v 1.0%e

- (UK) Dec Visible Trade Balance: -£7.3B v -£6.7Be; Total Trade Balance: -£3.3B v -£2.8Be; Trade Balance Non-EU: -£3.6B v -£3.1Be

- (SA) South Africa Q4 Unemployment: 24.3% v 24.5% prior

- (GR) Greece Jan Consumer Price Index Y/Y: 2.4% v 2.7%e

- (GR) Greece Dec Industrial Production Y/Y: -7.6% v -6.1% prior

- (RU) Russia Jan Budget Level YTD (RUB): 66.1B v -2.3T prior

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

- In equities: European markets rotated off their strong gains on Monday's session(which snapped a 3-consecutive negative trend) on an initially softfooting. Declines in the US, with the DOW closing below 10,000 and amixed session in Asia, that saw heavy trading in financials, set themacro background. Premarket corporate reports were dominated by UBS[UBSN.SZ] which broke a trend of 4-conecutive net losses with apositive Q1 net figure that beat expectations. Headline figures quicklygave way to focus on continued bleeding in the banks Wealth Managementhouse that saw further sizeable q/q declines in both North America andEurope. UBS opened sharply lower but served as a broad indicator ofmarket sentiment as shares led a gradual recovery in financials thatrallied markets. UBS nearly broke the unchanged mark at 4:30EST, butfell off its best levels in a trend that was mirrored by equitymarkets. Disappointed UK trade data served as an immediate catalyst tothis pare-back. Into 5:30ESt, European equity markets are off theirbest levels on in-line trading volumes.

- In individual equities: UBS [UBSN.SZ]: Reports Q4 Net adj CHF1.4B v CHF653Me, Rev CHF6.09B v CHF6.9Be.|| BskyB [BSY.UK]: Confirms placing of 404k ITV shares at 48.5p/shr for aggregate proceeds of £196M. || Heidelberger [HDD.GE]: Reports Q3 EBIT loss €13M v loss €41Me, Rev €578M v €538Me. ||

- Speakers: Greece Labor Ministercommented that the Gov't is considering raising average real retirementage to 63 from 61 by 2015. He added that the pension system would facefunding problems by 2015 if no measures taken ***Poland Finance Ministry issued its new convergence planto reduce deficit to under 3% by 2012. The plan noted that Public debtwould not exceed 55% of GDP between 2010-2012 period under Polishaccounting rules. The 2011 Debt-to-GDP would hit 56.3% under EU rules.The plan decided against setting a new target for adopting the euro.The government originally wanted to replace the zloty with the EuropeanUnion's single currency in 2012 ***Ireland Honohan stated that current Irish budgetary adjustments seemed to be at correct levels *** EU's Barrosocommented that there was further action required by Greece and the EUhad the ability to monitor the situation. He noted that all EU stateswere aware of the challenge and the need to reinforce economiccoordination within the EMU. The Maastrict Stability Pact needs to beproperly implemented. The Greek situation would be tougher without theEuro currency but the media treatment of the situation amplifies thedifficulties. ***Goldman Sachs Chief Economist O'Neill: Sees China's PBoC raising interest rate between one to three times in 2010 with the first hike coming at any time now.

- Currencies: The USD and JPY currencies were softer in the European session amidspeculation that the ECB would hold an emergency meeting to discussmeasures to head off contagion in the Greek debt crisis. Speculationmounted after ECB's Trichet left a meeting with the RBA a day early,which helped market sentiment. UK press taking note of recent CFTCCommitment of Traders report to surmise that traders and hedge fundshave amassed the largest ever short positions against the Euro on thessuspicions that the Greek crisis could give way to a full-blown attackon the euro. Nonetheless the EUR/USD remains to overtake the 1.3740 level,which was a prior upside acceleration point in May 2009 and the recenthourly high in the aftermath of the US Nonfarm payroll report lastFriday. Some dealers note that the problem for Europe is that if Greecereceived special treatment then what precedent this would be for otherperipherals and their adherence to the Maastrict growth and stabilitypact .

- Fixed Income: The Trichet story andimplications for a bailout have led to a decline in both cash yieldspreads against the core and outright CDS protection for Europe's morefiscally challenged nations. The Greek 10y has shed 10bps to trade atBunds +350bps while 5yr CDS has fallen by about the same amount totrade at +412bps. Portugal is the next best performer with 10 yearyields at Bunds +151bps and 5 year CDS at 235bps, both lower by about9bps. The DMO sold £2B in 24 year Gilts with robust results(bid-to-cover above 2x, yield tail 0.3bps), especially in light of thesignificant duration drop and the recent exit of the BoE from themarket.

-Geo/political: Iran has wastedno time in carrying out plans to accelerate its higher enrichment levelprogram. The operation, which Iran claims is for exclusive use in itsmedical reactor program is a fresh rebuff of increasingly wide spread,and consensus calls, for tighter sanctions. Iranian state media hasreported that the enrichment process began early on Tuesday at itsNatranz facility. Iran stands ready to celebrate the 31st anniversaryof the Islamic revolution on Feb 11. The date is now seen as a broadshowdown behind the hard-line gov and any domestic opposition. Clearlabeling of the opposition as foreign agents, in addition to the recentexecution of several demonstrators, has eliminated any room fornegotiation on the issue. *** US Defense Secretary Gates has expressconcern on an official level to French officials regarding the plannedsale of multiple amphibious assault ships of the Mistral class toRussia. The vessels, capable of landing armored vehicles and launchinghelicopters are valued at $750M/unit. NATO members in the Baltic's haveposed significant questions regarding the sale due to theirrelationship and proximity to Russia proper and Kaliningrad. *** Asexpected, current Ukrainian PM Tymoshenko will seek to contest lastSunday second round Presidential results. Supporters will seek recountsof some stations and contest the results of others. So far, all actionsthat have been called for have been in the political/legal realm, notmajor demonstrations or street protests. Reminder: On Sunday Feb 7,with 84% of Ukraine's election votes counted by Central ElectionCommission, Yanukovich leads Tymoshenko 48.5% to 45.9%

- In the papers: Article in German press (Der Spiegal ) entitled "How Goldman Sachs Helped Greece to Mask its True Debt.Article stated that Goldman Sachs helped the Greek government to maskthe true extent of its deficit with the help of a derivatives deal thatlegally circumvented the EU Maastricht deficit rules. At some point theso-called cross currency swaps will mature, and swell the country'salready bloated deficit. Greece's debt managers agreed a huge deal withthe savvy bankers of US investment bank Goldman Sachs at the start of2002. The deal involved so-called cross-currency swaps in whichgovernment debt issued in dollars and yen was swapped for euro debt fora certain period -- to be exchanged back into the original currenciesat a later date. Article pointed out that Such transactions are part ofnormal government refinancing. But in the Greek case the US bankersdevised a special kind of swap with fictional exchange rates.
Thatenabled Greece to receive a far higher sum than the actual euro marketvalue of 10 billion dollars or yen. In that way Goldman Sachs secretlyarranged additional credit of up to $1 billion for the Greeks. At somepoint Greece will have to pay up for its swap transactions, and thatwill impact its deficit. The bond maturities range between 10 and 15years.

Notes

- UBS reports first quarterly profit in over a year; clients have removed a net CHF228.1B over the 21 months through December

- ECB'sTrichet left a meeting with the RBA a day early, which helped fuel thatthe EU will find a solution to the peripheral debt situation and aidingoverall market sentiment

- Greece Fin Min: "The worst possible signal which we could send out is one calling for outside help "

- Greece labor Min: Seeks to raise retirement age from 61 to 63 by 2015

- Fed's Bullard comments deemed fairly hawkish comments. Sees discount rate rising soon and rates rising in steps.

Looking Ahead

- 7:30 (US) Jan NFIB Small Business Optimism: No est v 88.0 prior

- 7:45 (US) ICSC Chain Store Sales: No est v 0.1% prior

- 8:55 (US) Redbook Retail Sales: No est v 0.8% prior

- 10:00 (US) Dec Wholesale Inventories: 0.5%e v 1.5% prior

- 10:00 (US) Feb IBD/TIPP Economic Optimism: No est v 48.8 prior

- 10:00 (MX) Mexico Consumer Prices M/M: 1.0%e v 0.4% prior; Y/Y: 4.4%e v 3.6% prior; CPI Core M/M: 0.6%e v 0.5% prior

- 12:30 (UA) Ukraine to sell 2-year and 3-year bonds

- 12:30 (MX) Mexico to sell MXN2.5B in 5-year FRN and MXN2.5B in 30-year bonds

- 13:00 (US) To sell $40B in 3-year notes

- 16:30 (US) API Crude Oil/Gasoline/Distillate Inventories