European Market Update: Risk appetite continues to find some footing in 2012; Germany economic data continues to show


Economic Data

- (EU) ECB: €14.8B borrowed in overnight loan facility vs. €14.8B prior; €446.3B parked in deposit facility (just below all-time record levels) vs. €413.9B prior

- (DE) Germany Nov ILO Employment: 41.19M v 41.08M prior; Unemployment Rate: 5.5% v 5.6% prior

- (IE) Ireland Dec NCB Manufacturing PMI: 48.6 v 48.5 prior

- (NO) Norway Dec PMI Survey: 46.6 v 48.4e

- (ES) Spain Dec Net Unemployment M/M: +1.9K v +59.5K prior (fifth month of increases)

- (TR) Turkey Dec Consumer Prices M/M: 0.6% v 0.3%e v 1.7% prior; Y/Y: 10.5% v 10.1%e (highest since Nov 2008), CPI Core Y/Y: 8.1 v 8.2% prior

- (TR) Turkey Dec Producer Prices M/M: 1.0% v 0.7% prior; Y/Y: 13.3% v 13.7% prior

- (HK) Hong Kong Nov Retail Sales Value Y/Y: 23.5% v 21.7%e; Retail Sales Volume Y/Y:16.9% v 14.0%e

- (CH) Swiss Dec PMI Manufacturing: 50.7 v 45.4e

- (DE) Germany Dec Unemployment Change: -22K v -10Ke v -20K prior; Unemployment Rate: 6.8% v 6.9%e

- (UK) Dec PMI Manufacturing: 49.6 v 47.3e

Fixed Income:

- (EU) ECB allotted €130.6B vs. €135.0Be in 7-Day Main Refinancing Tender at fixed 1.0%

- (HU) Hungary Debt Agency (AKK) sells HUF45B in 3-month Bills, Avg Yield 7.67% v 7.43% prior

- (BE) Belgium Debt Agency sold approx €2.44B vs. €1.8-2.5B indicated range in 3-month and 6-month Bills

- Sold €1.28B vs. €1.28Be in 3-month April 2012 Bills, Avg Yield 0.264% v 0.780% prior; Bid-to-cover: 2.13x v 8.59x prior

- Sold €1.16B vs. €1.0Be in 6-month June 2012 Bills, Avg Yield 0.364% v 2.438% prior; Bid-to-cover: 2.01x v 2.67x prior

- (NL)) Netherlands Debt Agency (DSTA) sold approx €4.65B vs. €6.0B indicated in 3-month and 12-month bills

- Sold €2.99B vs €3.5Be in March 2012 Bills, Avg Yield 0.00% v -0.007% prior

- Sold €1.66B vs. €2.5Be in Dec 2012 Bills, Avg Yield 0.05% v 0.32% prior


SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Notes/Observations

- India's government to allow certain qualified foreign investors to invest directly in the domestic equity market

- Australia Manufacturing PMI registers its first expansion (above 50 reading) since June 2011

- Iran completes its 10-day naval exercise in the Straits of Hormuz

- Germany 2011 Avg Unemployment lowest since 1991

Equities:

FTSE 100 +0.90% at 5624 (closed on prior session), DAX +1% at 6132, CAC-40 -0.80% at 3197, IBEX 35 -1.3% at 8612, SMI +1.2% at 6004

- European shares rallied in thin post-holiday trading following stronger than expected German employment data. Traders are also anticipating a better than expected US manufacturing index.
French banks traded lower as the menace of an S&P downgrade of country's sovereign rating is still present in the markets which, in turn, has pushed the yield higher. Automakers were higher in the session following reports from German press that BMW [BMW.GE] expected a stable market in 2012 with growth opportunities in emerging markets. Afren [AFR.UK] rallied over 11% after exceeding its production guidance for 2011.

Speakers:

-China Premier Wen: Reiterates China 'prudent' monetary policy but to "fine tune" operations based on "situations"

- Fitch commented that it saw challenging outlook for France's local and regional gov't in 2012 and expected the negative trends of 2011 to continue in 2012. The regions and departments were especially hard hit by the abolition of business tax in 2010, which had reduced their revenue flexibility, while social andcountercyclical spending had soared and the frail economy was likely to result in weaker fiscal performance.

- EFSF to sell €3B in 3-year bonds in the near future (subject to market conditions) and use the proceeds to fund bailouts of Portugal and Ireland

- Greece gov't spokesperson: Greece likely to require additional fiscal measures

- ECB's Weidmann commented that he would try to maintain Bundesbank tradition for the euro zone and was cautions against financing public debt. He noted that monetary policy only worked when Governments have solid financing

- Spain Social Security State Sec Burgos commented that in 2011 the social security system would post deficit vs prior estimate of a small surplus Spain Social Security State Sec Burgos: In 2011 social security system to post deficit vs prior estimate of a small surplus

- Germany's IMK Institute forecasted Germany 2012 GDP at -0.1%

- Philippines Central Bank Gov Tetango commented that 2012 GDP growth might be at lower end of 5.0-6.0% range and the central bank would maintain 2012 inflation target range between 3-5%

- Hungary gov't spokesperson stated that it sought to begin IMF discussions by late January (Note: Hungarian IMF negotiator Fellegi said he was to visit IMF in Washington DC on Jan 11th but not part of formal process)

- Sweden Central Bank (Riksbank) Minutes from Dec 20th reiterated the main bullet points for the 25bps cut that the country's underlying inflation was low and economy was slowing down die to external factors. The minutes also reiterated that members Ekhholm and Svensson preferred instead to lower the repo rate more aggressively to 1.5%

- Swedish Central Bank Gov Ingves commented that there were clear signals that exports were slowing down and GDP was weak. Sweden did not need the same low rates as the countries in crisis bu that the European debt crisis was now subduing prospects more clearly. He did note that the impression that US economy was turning around with its GDP to be revised up slightly

- Riksbank member Wickman-Parak stated that acute risks did center on Europe rather than US but added that growth prospects abroad were not uniformly bleak as emerging economies had reasonable growth

- Riksbank dovish member Svensson commented in the minutes that it was less likely Europe debt crisis would be resolved in a good way

Currencies:

- Risk appetite continued to enter 2012 on improved footing aided by better Manufacturing PMI in numerous countries Asian/European coupled with continued resilience in the German economy. The USD was softer against the major and commodity-related pairs as a result.

- The EUR/USD probed the 1.3000 area during the early part of the session and did encounter some initial resistance at its 200-hour moving average of 1.3005. Dealers did note that 1.2940 level provided good support for the time being and the pair could test several big figures higher if current sentiment continues with 1.32 mentions as a potential upside target due to short positions accumulated in the Euro-related pairs over the past few weeks. The EUR/USD entered the NY morning above the 200-hour moving average and did test 1.3040 at one point.

- The GBP/USD tested 1.56 following its better PMI data but did hit some headwinds after Markit commented that the PMI data suggested that manufacturing would likely to be a drag on Q4 UK GDP figures.

- The ECB deposit facility remained close to record highs of €452B set just last week and borrowings remaining elevated at €14.8B.

- As noted numerous time over the last few weeks dealers continue to remain caution on the European sovereign front after those early December comments from S&P. Dealers still believe that key European ratings could be lowered in early 2012. S&P did put numerous countries on watch with concerns that Austria, Belgium, Finland, Germany, Netherlands, and Luxembourg could be cut by up to one notch for, and by up to two notches for the other governments (including France, Italy, Spain, and Portugal)

Political/ In the Papers:

- ECB expected to meet on naming a chief economist today. Former German Dep Finance Min Asmussen and former French Treasury official Coeure joined the ECB's board on Jan 1st (replacing members Stark and Bini Smaghi) and will both vie for the ECB chief economist role vacated by Stark

- Ambrose Evans-Pritchard offered his predictions for 2012. The risk of a credit crunch and recession could cause the ECB to cut rates to 0.5% by February. With regards to rating, he predicts EU countries including France and Austria could lose their AAA ratings, while Germany may eventually seek to exit the euro if its contingent liabilities related to the EU's rescue measures start to endanger its AAA rating.

- The Irish Times reported that analyses by the EU Commission and IMF published prior to Christmas revealed details of proposed measures for the 2013 budget. The analysis warned Ireland may require €3.5 billion in savings. The two main sections identified for the €2.25 billion in spending adjustments are for cuts in social protection expenditure and in public sector numbers. The IMF noted that social protection will contribute to the majority of government savings seen to be in upwards of €500 million for 2013.


Looking Ahead

- (CZ) Czech Dec Budget Balance (CZK): No est v -125.9B prior

- 6:00 (FR) France President Sarkozy presents New Year's greetings to armed forces

- 7:00 (EU) ECB to drain €211.5B in 7-day Term Deposit Tender to offset Govt Bond Purchases

- 9:00 (FR) France Debt Agency (AFT) to sell Bills

- 10:00 (US) Nov Construction Spending M/M: 0.4%e v 0.8% prior

- 10:00 (DK) Denmark Dec Foreign Currency Reserves (DKK): 477.7Be v 467.7B prior

- 10:00 (MX) Mexico Weekly International Reserves

- 10:00 (US) Dec ISM Manufacturing: 53.4e v 52.7 prior; Prices Paid: 48.0e v 45.0 prior

- 11:30 (US) Treasury to sell 3-Month and 6-Month Bills

- 13:00 (MX) Mexico Dec IMEF Manufacturing Index: 52.6e v 53.3 prior; Non Manufacturing Index: 53.7e v 54.1 prior

- 14:00 (US) Fed Releases minutes from Dec. 13th FOMC Meeting