FOREX TRADING

European Market Update

Two-way risk returns to the market

ECONOMIC DATA

(FI) Finland Oct PPI M/M 0.1% v 0.1%e; Y/Y; -8.4% v -8.0%e

(HU) Hungary Sept Avg Gross Wages Y/Y: 0.7% v 0.1%e

(SZ) Swiss Sept Retail Sales-Real Y/Y: -1.6% v -1.0% prior

(SW) Sweden Q3 Total Number of Employees Y/Y: -2.8% V -1.9% prior

(SP) Spain Sept Industrial Orders Y/Y: -18.8% v -18.6% prior; Service Sector Sales Y/Y: -10.6% v -13.4% prior; Service sector employment Y/Y: -6.0% v -6.3% prior

(HK) Hong Kong Oct Unemployment Rate: 5.2% v 5.3% prior

(RU) Russian Oct Industrial Production M/M: 0.8% v 5.1% prior, Y/Y: -11.2% v -8.1%e

(UK) Oct CPI M/M: 0.2% v 0.1%e; Y/Y: 1.5% v 1.4%e; Core CPI Y/Y: 1.8% v 1.8%e

(UK) Oct RPI M/M: 0.3% v 0.1%e; Y/Y: -0.8% v -1.0%; Retail Price Index Y/Y: 1.9% v 1.8%e

(EU) Euro-Zone Sept Trade Balance 3.7B v -2.3B prior; Trade Balance sa: 6.8B v 2.2B prior

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

In equities: European markets have traded lower from the open following a theme of risk aversion and profit taking that has rolled out of the Asian session. After yesterday’s highs, with the FTSE printing its best levels for 2009, equity markets appear to be taking a slight break. Commentary on the political front from US Pres Obama and Chinese Pres Hu, along with statements from the Fed’s Bernanke during the US and Asian sessions has fallen broadly into line with expectations (including the media blackout of Obama’s commentary on internet freedom in China). Sector trading has been mixed and lacked pure play dynamics. Earnings from retailer Burberry [BRBY.UK], and interbroker ICAP [IAP.UK] were decidedly mixed. The key corporate event of the morning has been the investor day conference at UBS [UBSN.SZ]. The troubled Swiss bank provided medium term unit guidance and stated that it expected to see a return to net capital inflows in its wealth management units in 2010. Basic materials and financial sectors led the decline on the EuroStoxx50 following commodity and Asian listed financials lower. Into 5:30EST, markets have remained choppy, trading on light volumes and all within the red.

In equities: UBS [UBSN.SZ] Targets CH15B in Yearly Pretax Profit in medium term – Analyst day comments. Aims for ROE of 15-20% Medium Term. Aims for a Cost-Income ratio of 65-70% in medium term. || Cable and Wireless CW.UK: Announces 200M convertible bond offering (6% of market cap). || Burberry [BRBY.UK] Reports H1 Pretax 78M v 79Me, Rev 572M v 570Me; SSS +2% v +5% q/q. || ICAP [IAP.UK] Reports H1 Pretax 139M v 167Me, Rev 809M v 823Me. || PPR [PP.FR] Sees spin off of CFAO unit at 24.80-29/ share, to raise as much as

Speakers: Chinese Vice Foreign Affairs Ministry noted that a stable Yuan currency has aided the global economic recovery from crisis. The official noted China’s stance on currency was very clear and that there was a misunderstanding about China’s currency reform. Too early too discuss exit strategies globally || ECB’s Trichet commented that a strong USD was ‘in the international interest ‘and reiterated his view that the Euro was not created to be a reserve. Trichet also reiterated that the current rates were appropriate. The Q3 figures confirmed gradual economic recovery view. He did note that Govt deficit problem were not exclusive to France; some govt in Europe are close to losing credibility ||EU’s Almunia commented that he saw signs of Chinese Yuan currency decoupling from dollar . China must rebalance economy and some appreciation of its currency was necessary. He reiterated views that protectionism is the biggest threat to global economy and no short term inflationary pressures. He noted that the world needs more balanced international monetary system || BOE’s Sentence stated that asset bubbles were not so much of a concern at this time and added that UK asset prices were not historically high. The BoE was not yet in a position to consider tightening of interest rates. Short-term UK CPI might fall below 2% and be volatile. UK inflation could be affected by both domestic and global factors but was very comfortable with BoE CPI projections || ECB’s Mersch commented that the Tobin Tax was a ‘scurrilous’ idea and that we need to revisit financial and economic paradigms. The economic environment stable after reactions from governments and central banks ||India Trade Min: Believe exports can turn positive in Jan-March quarter. India needs 25% manufacturing growth to help increase GDP || Kuwait Foreign Min commented tnat the Gulf Common Currency (GCC) countries would discuss possibility of pegging single currency to basket || Fed’s Yellen commented that higher interest rates could help manage systemic risk; stem damaging leverage and guard against asset bubbles. She noted that it was unclear whether rate policy could blunt nascent bubble || SNB’s Roth stated that 2010 will be a difficult year for Switzerland

Currencies: The USD painted an initial mix picture against the major pairs on Tuesday but moved into positive territory as the day progressed. USD began the European morning in steady frame of mind in the aftermath of Fed Chairman Bernanke comment that significant economic challenges remained. The topic of currencies was brought up during President’s Obama visit to Beijing. Obama stated he was pleased with China’s past comments to move towards a more market-oriented exchange rate over time. Chinu’s Hu stated ‘no comments’ when asked about exchange rate. However, the Chinese Vice Foreign Affairs Ministry expressed his view that China’s stance on currency was very clear and that there was a misunderstanding about China’s currency reform. ECB’s Trichet slightly changed his wording of the strong dollar template to note that a strong USD was ‘in the international interest ‘from the usual acknowledgment that the US sought a strong dollar. The double no-touch option chatter continues to circulate in the EUR/USD with the strikes between 1.48 and 1.51. For the session, the EUR/USD tested 1.49 before consolidating. The euro’s inability to register a new cycle high doies prompt some speculation that a break below 1.48 opens the door for a renewed test of the March uptrend line around the 1.4630 area.

The GBP was firmer in the session on renewed chatter of M&A flows related to Cadbury. The UK annual Oct CPI inflation registered a higher sequential reading for the first time since Feb but remain below the BOE’s 2.0% target. GBP/USD tested 1.6870 aided by stops being set off in the EUR/GBP pair, which hit fresh two-month lows below 0.8850 level || IMF’s Strauss-Kahn reiterated that a stronger Chinese Yuan currency would benefit China to increase domestic demand

China and Asian region currencies would strengthen over time and perhaps the Yuan could become part of SDR after some period of time

Fixed Income: European government bonds have seen little follow though from yesterday’s Bernanke induced rally in Treasuries. Gilts are bid across the curve with the best buying in the belly whilst German bonds are marginally weaker with a slight flattening bias. The 10y Bund is steady at 3.323%, with the 10y note less than 3bps cheaper with early parity last tested in early June. Despite the first sequential increase UK CPI was broadly in line with market expectations, but still below the BoE’s 2% target. In the only supply of the session, Ireland sold 1B in 5 and 10y bonds with strong results.

In Energy || Nigeria’s MEND stated that a ceasefire was under threat after army operations performed a weapons search against former commanders || IMF sells two tons of gold to Mauritius valued at $71.7M. This is the second such sale by the IMF since September

Notes:

Asian and European equities see no follow-through to the upside.

Fed chief borrows another page from the Japan playbook as he is monitoring the dollar. Fed’s Tuesday’s comments brings back two-way risk to markets for the time being

Lots con continued central bank speak set for today’ Fed’s Lacker today on economic outlook. Pianalto today at a housing conference. Tumpel-Gugerell on 10 years of the Euro. Tomorrow Fed’s Bullard. ECB’s Trichet lining up a few appearances as well

Meredith Whitmey reiterates the bear call.

IMF: Fairly targeted comments with little or no reaction.

Looking Ahead:

8:30 (US) Oct PPI M/M: 0.5e v -0.6% prior; Y/Y: -1.8%e v -4.8% prior

8:30 (US) Oct PPI Ex food & energy M/M: 0.1%e v -0.1% prior; Y/Y: 1.4%e v 1.8% prior

9:00 (US) Sept Net Long-Term TIC Flows: $30.0Be v $28.6B prior; Total Net TIC Flows: No estimate v $10.2B prior

9:15 (US) Oct Industrial Production: 0.4%e v 0.7% prior; Capacity Utilization: 70.8%e v t 70.5% prior

(SA) South Africa Central Bank interest rate decision: No change expected from the current 7.00% rate

09:30 ECB’s Stark to speak,

10:15am Fed’s Lacker speaks on the economy

11:00 ECB’s Tumpel-Gugerell to speak,

12:00 ECB’s Trichet, EU’s Juncker speak in Frankfurt

12:30 Fed’s Pianalto addresses housing conference.

13:00 (US) Nov NAHB Housing Market Index: 19e v 18 prior

14:00 Treasury Secretary Geithner to speak

Trade The News Staff
Trade The News, Inc.

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