European Market Update: Europe weathers the initial effects of the multi-country sovereign downgrade by S&P after the close last Friday; Moody’s still assessing France’s stable outlook

by: Isla Marchant on: January 13, 2012

***Economic Data***
– (PH) Philippines Nov Overseas Remittances: $1.8B v $1.8B prior; Y/Y: 10.6 v 6.2% prior
– (EU) ECB: €2.4B borrowed in Overnight Loan Facility vs €1.5B prior; €493.3B (fresh record highs) parked in Deposit Facility vs. €489.9B prior
– (IN) India Dec Monthly Wholesale Prices Y/Y: 7.5% v 7.4%e
– (DE) Germany Dec Wholesale Price Index M/M: 0.0% v 0.7% prior; Y/Y: 3.0% v 4.9% prior
– (CZ) Czech Nov Export Price Index Y/Y: 5.8% v 4.5% prior; Y/Y: 7.6% v 6.9% prior
– (CZ) Czech Dec PPI Industrial M/M: 0.1% v 0.2%e; Y/Y: 4.6 v 4.7%e
– (DK) Denmark Dec Wholesale Prices M/M: 0.1 v 0.1% prior; Y/Y: 4.1% v 5.2% prior
– (TR) Turkey Dec Consumer Confidence: 92.0 v 91.0 prior
– (TR) Turkey Oct Unemployment Rate: 9.1% v 8.8% prior
– (CH) Swiss Dec Producer & Import Prices M/M: +0.3% v -0.1%e; Y/Y: -2.3% v -2.8%e
– (AT) Austria Dec Consumer Price Index M/M: 0.2% v 0.1% prior. Y/Y: 3.2% v 3.6% prior
– (NO) Norway Dec Trade Balance (NOK): 41.2B v 35.5B prior
– (IT) Italy Dec Final CPI (NIC incl. tobacco) M/M: 0.4% v 0.4%e; Y/Y: 3.3% v 3.3%e
– (IT) Italy Dec Final CPI EU Harmonized M/M: 0.3% v 0.3%e; Y/Y: % v 3.7%e
– (IT) Italy Nov General Government Debt: €1.905T v €1.909T prior
– (IS) Israel Q3 Final GDP Annualized: 3.6 v 4.8% prelim

Fixed Income
– (SK) Slovakia Debt Agency (ARDAL) sold €294.5M in 12-month Bills, Yield 1.9699%, Bid-to-cover: 3.03x
– (NL) Netherlands Debt Agency (DSTA) sold approx €3.21B vs. €3.0-5.0B indicated range in 3-month and 12-month Bills
– Sold €2.19B in April 2012 Bills; Avg Yield 0.011% v 0.080% prior; Bid-to-cover: 2.51x v 2.30x prior
– Sold €1.02B in June2012 Bills; Avg Yield 0.013% v 0.009% prior; Bid-to-cover: 4.00x v 2.81x prior

*** SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM ***
***Notes/Observations***
– Moody’s says need for time to asses France’s Stable sovereign outlook.
– Pivotal week for Greek debt talks; Greece again expresses optimism that talks will end on a positive note
– Key week for major US financials with Citi and Wells Fargo reporting on Tuesday. Goldman Sachs, State Street Bank, BAC and Morgan Stanley later in the week
– Japanese officials quite vocal on 11-year lows in EUR/JPY cross

Equities:
EuroStoxx at 2331.38, -0.28%, FTSE100 at 5619.1, -0.31%, DAX at 6152, +0.16%, CAC40 3178.28, -0.68%

– European shares traded in negative territory, erasing past week’s gains, after S&P’s sweeping action on sovereign ratings. France’s one-notch downgrade was already priced in the market as borrowing costs reflected an AA+ note. S&P again noted the political impasse and the inability of EU leaders to arrive at a sustainable solution. France’s officials played down repercussions of the downgrade noting that while the downgrade is unwelcome it is not a catastrophe.
– Banks were lower following S&P’s action but carmakers rallied after Goldman Sachs recommended the sector. Carnival [CCL.UK] dropped over 17% following Italian’s cruise ship sinking during the weekend. Company noted that it expected major claims from the tragedy.

Speakers:
– Moody’s commented on France and that it was still assessing its stable outlook on its AAA sovereign rating and would provide an update later in Q1. The agency noted that credit opinion on France saw deterioration of debt metrics and potential for contingent liabilities wee pressuring outlook. France ‘AAA’ sovereign rating could come under pressure if debt/GDP continued to rise or European debt crisis worsened. French government has less room to maneuver on public finances than it had in 2008
– German Fin Min Schaeuble commented that the S&P decision on multi-cut European downgrade last week indicated urgent need to act on limiting influence of ratings agencies. He noted that German guarantees for EFSF were sufficient.
– Italy PM Monti commented that the : S&P sovereign downgrades have highlighted Italy’s fiscal efforts and emphasized failure of EU governance
– EU President Van Rompuy commented that he had a large convergence of views with Italy PM at today’s meeting. He noted that financial stability was key for Euro region and sustained and committed efforts were needed. Must return economies to a sustainable growth path and that real progress had been made despite skepticism
– French govt official: Coordination of agenda might result in delay of planned Thursday meeting in Rome between German Chancellor Merkel, French President Sarkozy and Italy PM Monti
– EU’s Corbett commented that the next EU Summit to focus on economic growth and noted that the recent S&P might have behind the curve on recent European downgrades but could have European leaders focus on the issues at hand
– Greece PM Papademos commented that talks were close to an agreement; Sees a mutually acceptable agreement with creditors
– Japan Senior Vice Fin Min Igarashi commented that it was not the time to take action on Euro price action but did need to watch the Euro currency closely. He did add that the recent price movements in EUR/JPY cross weres been a bit rapid and needed to check on how long weakness in cross to continue. He was aware that it was harder for Japanese companies to cope with EUR/JPY declines compared to that seen in the USD/JPY pair.
– Netherlands Fin Min de Jager commented that sustainable debt for Greece was a condition to provide support, otherwise no finance to be provided
– Japan Dep PM Okada commented that the country’s finances wee unsustainable if consumption tax increase was delayed for years
– Japan’s former MoF official Sakakibara (aka Mr. Yen) commented that Japanese sovereign downgrade was possible in near future and that the strong Yen trend would likely continue. FX intervention would only be successful if done on a coordinated basis and with support of US while politically motivated intervention would not stand much chance of success.
– Poland Central Bank’s Chonja-Duch commented that she saw Polish interest rates holding steady in Q1 but added that 2012 CPI should remain above 2.5% level. The PLN currency should strengthen in 2012. Lastly she noted that the central bank did post a profit for 2011.
– Poland Central Bank Hausner commented that steady Polish interest rates was the most desired scenario at this time but new CPI forecast might spur Polish rate-shift stance. A drastic Polish GDP slowdown was seen as an unlikely scenario but that the PLN currency volatility was a threat to economy and not linked to fundamentals
– Former-Greece PM Papantoniou commented that he envisioned the PSI discussions to be successful and noted that ‘drama’ always surrounded such discussions. Any Greece exit from EMU would be very hard
– Fitch revised Russia outlook to Stable from Positive but did affirm its sovereign rating at ‘BBB’. Fitch noted that the political uncertainty in Russia had risen and the global economic outlook had worsened since September 2011. The likelihood of an upgrade had receded and the balance of risks was better reflected by a Stable Outlook
– (IN) India Trade Sec Khullar commented that the preliminary Dec Trade Balance was seen at -$12.8B vs. -$13.6B in Nov
– (IN) India PM Econ Advisor Rangarajan: FY12 GDP growth seen around 7.0%
– Norwegian Petroleum Directorate reports 2011 production: Crude production at 1.7M bpd and forecasted 2012 Crude Production at 1.6M bpd
– Saudi Oil Min Ali al-Naimi commented that the country’s oil production could be raised to 11.4-11.8M bpd from current output of 9.4-9.8M bps almost immediately. He also noted that the Strait of Hormuz would not be shut down for any length of time.

Currencies:
– The Euro was steady for the bulk of the European morning following the multi-country sovereign downgrade by S&P after the market close on Friday. The EUR/USD managed to hold above the lows established on Friday of 1.2622. The EUR/JPY cross did hit fresh 11-year lows during the Asian session at 97.04
– Throughout the session interbank FX dealers noted that the 1.2600 appeared to be ‘pivotal’ for the EUR/USD as it played a key role in prior quarters. There was chatter of large euro sell-stops lurking below (unconfirmed). The pair was slightly negative compared to its Far East opening level and was around the 1.2660 as the NY morning approached.
– Japanese officials were vocal on the weak euro. Japan Senior Vice Fin Min Igarashi summed up the sentiment noting that it was not the time to take action on Euro price action but would continue to watch Euro currency closely
– The ECB said to be again buying peripheral bonds via its SMP program as European spreads widened in response to the S&P sovereign downgrades from late last week.

Political/ In the Papers:
– The Telegraph noted ECB borrowing by euro zone banks are expected to double to over €1.0 trillion. According to Credit Suisse, the use of ECB’s three-year funding program is set to exceed €500B in February when lenders are offered second chance to access new LTRO. ECB’s willingness to provide an increasing proportion of the short and longer-term funding required by euro zone banks has led to a widening gap in the size of its balance sheet compared to those of the Bank of England and the Federal Reserve.
The UK Manufacturer’s Organisation EEF released a report noting that the manufacturing sector is uncertain about 2012 economy, and added forecasts for the 2012 UK economy to increase by 1% (note the OBR estimates it at 0.7%). Half of the UK manufacturing bosses see the economy to decline further in 2012 due to the euro zone crisis; manufacturing sector has serious concerns about the global economic outlook, raw material shortages. The survey of 204 companies indicated about a fifth of executives sees 2012 UK economic conditions to be better than in 2011, 49% believe the conditions will decline.
– The Irish government and Troika are at a standstill over doubling the volume of asset sales to €4 billion. According to a source, discussions described the situation as “deadlocked”, with the government prepared only to agree to raise €2B from assets sales. Another source stated that the IMF is more flexible, though the ECB and EU are taking a tougher stance, as they want their money back and are less concerned about the negative effects on the economy. There is more agreement between the government and Troika on the need for more budgetary cuts, public-sector wage/bill changes and labour market reforms.

***Looking Ahead***
– (PE) Peru Dec Unemployment Rate: No est v 7.0% prior
– 8:30 (EU) EU’s Almunia speaks at EPC Event in Brussels
– 9:00 (BE) Belgium Nov Trade Balance: No est v €915.9M – -
– 9:00 (FR) France Debt Agency (AFT) to sell Bills
– 9:15 (UK) Ministers Questioned on Privacy, Injunctions
– 9:30 (EU) ECB announces weekly settlements in govt bond buying program (SMP)
– 9:30 (EU) ECB announces bids in its 7-day and 1-month Main Refi Operation
– 9:45 (UK) BOE to buy £1.7B 2015-2020 Gilts in reverse auction
– 11:00 (EU) ECB chief Draghi
– 15:00 (RU) Finland President Halonen visits Russia to meet President Medvedev
– 21:00 (CN) China Dec Industrial Production Y/Y: 12.3%e v 12.4% prior; IPYTD: 13.8%e v 14.0% prior
– 21:00 (CN) China Dec Urban Fixed Assets Inventory: 24.1%e v 24.5% prior
– 21:00 (CN) China Q4 Real GDP Q/Q: No est v 2.3% prior; Y/Y: 8.7%e v 9.1% prior; GDP YTD: 9.2%e v 9.4% prior
– 21:00 (CN) China Dec Retail Sales Y/Y: 17.3%e v 17.3% prior; Sales YTD: 17.0%e v 17.0% prior

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