Morning Note Oct 14

October 14, 2011


Equity futures are trading above fair value ahead of today's Oct Michigan Consumer Sentiment at 09:55 ET and as G20 Finance ministers are meeting in Paris today to find a solution to the debt crisis. Greece remains the central focus but fears of a spread to other Eurozone countries and banks remains high.


China's September CPI eased slightly to +6.1% y/y, in line with estimates, while Producer Prices rose +6.5% y/y, slightly below expectations of +6.8%.

Standard and Poors lowers Spain's long-term rating to AA- from AA; outlook negative.

Lipper reports equity fund outflows of ($24M) in w/e 12-Oct vs outflows of ($5.9B) in w/e 5-Oct.

Libor fixings 

- Overnight Libor: Dollar: 0.139% vs prior 0.141% ; Sterling: 0.584% vs prior 0.584%; Euro: 0.879% vs prior 0.881%
- 1-month Libor: Dollar: 0.243% vs prior 0.243% ; Sterling: 0.694% vs prior 0.693%; Euro: 1.304% vs prior 1.304%
- 3-month Libor: Dollar: 0.405% vs prior 0.403% ; Sterling: 0.965% vs prior 0.964%; Euro: 1.505% vs prior 1.504%

WTI +$1.03 to $85.26

Natural gas +$0.006 to $3.537

Spot Gold +$7.50 at $1674.00


Asian Markets

Asian markets closed lower after data showed Chinese inflation eased slightly in September and after S&P's downgrade of Spain's long-term debt to AA- from AA reignited the persistent worries about Europe's sovereign debt crisis. China's September CPI eased slightly to +6.1% y/y, in line with estimates, while Producer Prices rose +6.5% y/y, slightly below expectations of +6.8%. Meanwhile, China's Business Climate Index fell to 133.4 in Q3, it's lowest level of the year, and the Entrepreneur Confidence Index fell to 129.4, the first decline below 130 in a year-and-a-half. Exporters and resource companies, among the strongest performers recently, led the declines as investors fear a global slowdown in demand. Singapore eased its monetary policy, as expected, citing softening demand in "the advanced economies". The yen is trading at 76.93 to the US dollar.


European Markets

European equity markets, after a cautious start that saw indices fluctuate either side of unchanged, have moved higher and currently trade close to the day's best levels, the main exception being Spain (0.1%) impacted by Spain's credit rating being downgraded to AA- from AA, outlook negative at S&P. Banks were pressured by credit rating actions, Fitch downgraded of UBS (UBSN.VX), placing on review the ratings of global trading and universal banks and five major European commercial banks and Goldman Sachs cutting 2011 EPS estimates for European investment banks. Technology shares were buoyed by Google's (GOOG) results, GOOG shares trading up +7.6% in Frankfurt. China's inflation remained elevated in the latest monthly report that added to the early caution. Italy's PM Berlusconi is expected to win a vote of confidence later today. G20 finance ministers hod a meeting this weekend. Eurozone Sept Final CPI +3.0% y/y vs consensus +3.0% and prior +3.0%. The pound and the euro are trading at $1.5776 and $1.3804 respectively.


Today's Economic Releases (Eastern Time)

08:30 US Import Price Index (Sep); consensus (0.4%)
08:30 US Retail Sales (Sep); consensus +0.8%
08:30 US Retail Sales ex Autos (Sep); consensus +0.4%
09:55 US Michigan Consumer Sentiment (Prelim.) (Oct); consensus 60.0
10:00 US Business Inventories (Aug); consensus +0.4%
14:00 US Treasury Budget (Sep); consensus ($65.1B) 

Today's Key Events (Eastern Time)

—:— CTIA Wireless Power Summit
—:— Dell World 2011
—:— FDA PDUFA: ApoPharma's NDA for Ferriprox (deferiprone) for iron overload when current chelation therapy is inadequate
—:— G20 finance ministers meeting
—:— Global Hunter Securities with Revett Minerals
—:— Novell BrainShare
14:30 Fed's Kocherlakota speaks 


Company Specific News

Earnings
CCF (Chase Corporation reports Q4 EPS cont. ops. $0.40 vs year-ago $0.43)
KFRC (kforce.com guides Q3 EPS ~$0.22 vs prior $0.17-$0.19 and Reuters $0.18)
MAT (Mattel reports Q3 EPS $0.86 vs Reuters $0.86; increases repurchase authorization by $500M)
MCHP (Microchip guides Q2 net sales to ~$340.6M, below prior $352.0-370.8M, and vs. Reuters $365.0M)
NCMI (National CineMedia reaffirms Q3 guidance; reduces 2011 outlook to $425-$435 million vs prior $460-470M)
NDN (99 Cents Only reports Q2 total comps +6.7% vs consensus +2.0%)
SAP (SAP reports record 32% growth in Q3 software revenue at constant currencies, Reiterates the high end of its full year outlook)
VMI (Valmont reports Q3 EPS $1.59 vs Reuters $1.53; Reports Q3:
Revenues $672.2M vs Reuters $642.0M)

M&A
IP (International Paper completes acquisition of majority stake in Andhra Pradesh Paper Mills)

Offerings
AT (Atlantic Power Corp 11M share secondary priced at US$13.00 / C$13.26 per share through TD Securities and Morgan Stanley)
ISR (IsoRay discloses offering of 2.5M shares at $0.92 per share as part of best efforts offering through West Park and View Trade)
PEP (PepsiCo files mixed shelf of indeterminate amount)

Other News
Fed reports balance sheet assets of $2.863T on Wednesday, +$938M w/w and +$550.8B y/y.
Holdings of US Treasury securities were $1.669T on 12-Oct, ($3B) w/w and +$847.6B y/y
Holdings of mortgage-backed securities were $870.9B on 12-Oct, unchanged w/w and ($207.7B) y/y.
Holdings of federal agency debt securities were $108.3B on 12-Oct, unchanged w/w and ($43.9B) y/y.

Eurozone sovereign debt crisis 
- S&P cuts Spain rating by one notch on weak growth: Reuters noted that S&P cut Spain's credit rating on Friday to AA- from AA, citing unemployment, tightening credit and high private-sector debt. The outlook remains negative Recall that Fitch made a similar move last week. In response to the downgrade, Spain's Treasury said in a statement that "S&P underestimates the scope of the unprecedented structural reforms undertaken, which will obviously take time to bear fruit." The article also noted that a senior official told the FT that Spain will have a "difficult" time meeting the 6% deficit target (the WSJ also has a story discussing the deficit risks).
- Europe crafts rescue plan with more IMF firepower: Bloomberg noted that European officials are outlining a rescue plan that may include larger haircuts on Greek bonds, higher bank capital levels and increased firepower for both the EFSF and the IMF. The article said that the key components of the plan emerged as finance ministers and central bankers from the G20 began talks in Paris today. It added that European leaders may complete the plan at a 23-Oct summit to present to a gathering of G20 chiefs in early November.
- Emerging countries in talks on IMF boost: The FT reported that emerging market countries are considering ways to quickly contribute money to expand the firepower of the IMF. The paper add that sources say that governments are considering either funding an IMF-run special purpose vehicle (SPV) or lending to the IMF by purchasing special bonds. The article noted that while the details still have to be hashed out, the increased firepower could be used to finance new IMF credit lines to prevent contagion from the Greek crisis spreading to Italy and Spain, or to recapitalize European banks. The FT said that the size of the funding plan remains under discussion, but noted that any lending facility will need to run into the hundreds of billions of dollars.
- Officials narrow options for EFSF: The WSJ noted that a senior French official on Thursday backed using the EFSF to insure bonds from troubled Eurozone countries as an effective way to expand its firepower, signaling signs of an emerging consensus on how to fight the deepening debt crisis. The paper added that while France would prefer to turn the bailout fund into a bank, Germany opposes allowing the EFSF to tap ECB funding. The article pointed out that Germany has not opposed the insurance option it as it has other ideas.
- Policymakers say Greek deal must avoid default: The FT noted that senior European policymakers insist that any deal to persuade Greek bondholders to take a bigger haircut in a new bailout for Athens must avoid a full-scale default. The paper added that this mandate could limit the size of investors' losses. According to the article, investors involved in the talks said it would impossible to get a voluntary deal done with haircuts as big as 50%, a level that has been pushed for by some in Berlin. The FT noted that new talks between government and bank negotiators have already begun, adding that they have focused on lowering interest rates and extending maturities. The article went on to note that such moves could push haircuts to a more acceptable 40% range.
- German bankers argue against capital plans: The WSJ noted that German bankers rallied on Thursday against EU proposals that would force Europe's banks to raise capital and write down the value of Greek debt on their books. The bankers argued that the moves could trigger the kind of financial crisis that Europe's leaders are working to avoid. The article cited recent comments from Deutsche Bank CEO Josef Ackermann, while noting that the five major German banking associations also sent a letter to German Finance Minister Wolfgang Schäuble, warning against phasing in regulatory requirements too quickly. The paper also pointed out that while some Eurozone officials are discussing haircuts of as much as 60% on Greek debt, people familiar with the negotiations say that banks are currently trying to negotiate a voluntary writedown of 40%.
- Trichet interview in the FT: The FT conducted an interview with outgoing ECB President Trichet. He noted that "The ECB has done all it could to be up to its responsibilities in exceptional circumstances," adding that "The ultimate backstop is, of course, the governments. To do anything that would let governments off their responsibilities would be a recipe for failure." He also pointed out that Eurozone leaders “have said very clearly that Greece is a special case and that as regards all other countries, the goal was to fully honour the signature of governments. I would say it is important to avoid any ambiguity in this respect."
- Berlusconi confidence vote on knife edge: CNBC noted that it looks as if Prime Minister Silvio Berlusconi's cabinet will survive a confidence vote today, though "only by the skin of its teeth". The article said that local media reports suggest that 306 members ofItaly's lower house of parliament will vote in favor of the government, 290 will vote against it and 34 have yet to decide. It added that if Berlusconi loses the vote, he will have to resign and try to find an alternative majority in parliament. If he is unable to achieve this, Italian President Giorgio Napolitano will have to try and form an interim alternative government led by another Prime Minister.


Newspaper Articles / Headlines

Le Figaro
- GDF Suez appeals government decision to freeze gas prices. Le Figaro reports that three weeks after the announcement of the government to freeze gas prices for consumers starting 1-Oct, GDF Suez is now taking action, as expected by filing on Thursday an action to the Council of State to request the cancellation of the decision.

Les Echos
- Areva considers the estimated €3.6B of additional costs for the Finnish EPR are baseless. The €3.6B estimate was given by MP Marc Goua who had on 11-Oct warned of additional costs faced by Areva.
- Veolia Environnement plans sale of Citelum unit. Without citing its source, the newspaper reports Veolia has mandated DC Advisory to find a buyer for the unit following its plan to divest €4B in assets by 2013. In 2010 Citelum generated a turnover of €276M. The newspaper also reports that Veolia is finalizing the sale of Proxiserve, newly renamed "Veolia Habitat Services"

Wall Street Journal
- Unilever near deal to buy Russia's Concern Kalina for $850M. Citing people familiar with the matter, the Journal reports that Unilever is nearing a deal to buy Concern Kalina, a Russian skincare company, for about $850M.
The Journal says the deal could be announced as early as Friday.


Research

Citi: downgraded ECL, FXCM
Fitch: downgraded UBS
- reviewing global trading and universal banks:
Barclays Bank (BARC.LN)
BNP Paribas (BNP.FP)
Credit Suisse (CSGN.VX)
Deutsche Bank (DBK.GR)
Goldman Sachs (GS)
Morgan Stanley (MS)
Societe Generale (GLE.FP)
- places five major European commercial banks on rating watch negative: Banque Federative due Credit Mutuel
Credit Agricole (ACA.FP)
Danske Bank (DANSKE.DC)
OP Pohjola Group
Rabobank Group (RABO.NA)
Jefferies: upgraded ADTN
JP Morgan: downgraded NCMI
Keefe Bruyette: upgraded AMP
Oppenheimer: downgraded BA, HRS
Standard & Poors: downgraded Spain's long-term rating to AA- from AA; outlook negative
Stifel Nicolaus: downgraded RA
Ticonderoga: downgraded MON
Wells Fargo: downgraded GPS
Wunderlich: downgraded PNG




GLOBAL NEWS
? EUROPE�
1. European officials are outlining a rescue plan that may include deeper investor losses on Greek bonds, higher bank capital levels and increased firepower for bailouts and the IMF.
2. Germany Backing Italian Debt Seen as Key to Europe Bank Crisis
3. Shareholders in European banks  are resisting calls to pump more capital into the industry, pressure that may leave taxpayers as the investors of last resort.
4. Britain�s banks are selling the most asset-backed bonds denominated in dollars in at least five years.
5. European insurers may redeem subordinated bonds depressed by the region�s debt crisis because they won�t qualify as core capital under rules being introduced in 2013.
6. Greek bondholders are preparing to lose as much as 60% of their investments as European leaders try to impose a solution that reduces the nation�s debt burden by enough to end the debt crisis.
7. FRENCH 10-YEAR YIELD PREMIUM OVER BUNDS REACHES EURO-ERA RECORD
8. Portugal Plans Deeper Cuts in Moment of �National Emergency�
9. Berlusconi Fights for Political Survival as Yields Surge
10. Belgium Moves Toward Full-Time Government After 488-Day Deadlock
11. Lehman Catastrophic Moment Invoked as EU Seeks Crisis End
? U.S.A.�
1. VIX tumbles most in 19 years. Corporate profits are calming U.S. stocks more than any time in 19 years, reducing the cost of insurance against losses.
2. Lenders Will Shun $231 Billion Rollover of U.S. Emergency Loans
3. The eight largest U.S. money-market funds reduced their lending to French banks by 44% last month as the European sovereign debt crisis worsened.
4. Wall Street Protesters Pledge to �Defend� Their Park Occupation. Wall Street Protesters Can�t Return Gear to Park, NYPD Says
5. BlackRock�s Fink Says He�s Encouraged by Protests on Wall Street
6. Rajaratnam May Join Madoff, Blind Sheikh in �Crown Jewel� Prison
7. Air-Traffic Errors Near Airports More Than Double in 3 Years
? CHINA�
1. China�s Sept. M2 Rises 13.0%, New Yuan Loans 470 Billion Yuan
2. China�s Sept. Consumer Prices Rise 6.1% From Year Earlier
3. China�s bank lending last month was the least since 2009 as inflation stayed above the government�s target, highlighting the risk that efforts to tame prices will trigger a slowdown.
? SPAIN� Spain has its long-term sovereign credit rating cut to AA- from AA by S&P
? RUSSIA-- The lowest yields on debt compared with equities since 2008 are spurring Russian companies to buy back their own shares with borrowed money.
? CANADA� Canada�s bond market  is having its worst month in almost two years.
? INDIA� India inflation exceeds 9% 10th month amid rate pressure
? GOLD�
1. Gold�s biggest slump in three years means traders and analysts are now the most bullish in three months, speculating that Europe�s debt crisis, slowing growth and a bear market in equities will drive demand for bullion.
2. Gold may surpass $2,000 per ounce for the first time by early next year, as central banks in emerging markets add the precious metal to reserves to diversify away from the dollar.
? COMMODITIES�
1. Baltic Index Reaches 2011 High for Sixth Session on Coal, Grains
2. Gold Traders Most Bullish Since July
3. Commodities Head for Biggest Gain in 6 Months
4. Oil Heads for Second Weekly Gain
5. Copper Rises, Heads for Second Weekly Gain
6. Gold Gains
7. Wheat Gains
8. Coffee Climbs to One Week-High
9. Cocoa Rises


GLOBAL NEWS
? EUROPE�
1. European officials are outlining a rescue plan that may include deeper investor losses on Greek bonds, higher bank capital levels and increased firepower for bailouts and the IMF.
2. Germany Backing Italian Debt Seen as Key to Europe Bank Crisis
3. Shareholders in European banks  are resisting calls to pump more capital into the industry, pressure that may leave taxpayers as the investors of last resort.
4. Britain�s banks are selling the most asset-backed bonds denominated in dollars in at least five years.
5. European insurers may redeem subordinated bonds depressed by the region�s debt crisis because they won�t qualify as core capital under rules being introduced in 2013.
6. Greek bondholders are preparing to lose as much as 60% of their investments as European leaders try to impose a solution that reduces the nation�s debt burden by enough to end the debt crisis.
7. FRENCH 10-YEAR YIELD PREMIUM OVER BUNDS REACHES EURO-ERA RECORD
8. Portugal Plans Deeper Cuts in Moment of �National Emergency�
9. Berlusconi Fights for Political Survival as Yields Surge
10. Belgium Moves Toward Full-Time Government After 488-Day Deadlock
11. Lehman Catastrophic Moment Invoked as EU Seeks Crisis End
? U.S.A.�
1. VIX tumbles most in 19 years. Corporate profits are calming U.S. stocks more than any time in 19 years, reducing the cost of insurance against losses.
2. Lenders Will Shun $231 Billion Rollover of U.S. Emergency Loans
3. The eight largest U.S. money-market funds reduced their lending to French banks by 44% last month as the European sovereign debt crisis worsened.
4. Wall Street Protesters Pledge to �Defend� Their Park Occupation. Wall Street Protesters Can�t Return Gear to Park, NYPD Says
5. BlackRock�s Fink Says He�s Encouraged by Protests on Wall Street
6. Rajaratnam May Join Madoff, Blind Sheikh in �Crown Jewel� Prison
7. Air-Traffic Errors Near Airports More Than Double in 3 Years
? CHINA�
1. China�s Sept. M2 Rises 13.0%, New Yuan Loans 470 Billion Yuan
2. China�s Sept. Consumer Prices Rise 6.1% From Year Earlier
3. China�s bank lending last month was the least since 2009 as inflation stayed above the government�s target, highlighting the risk that efforts to tame prices will trigger a slowdown.
? SPAIN� Spain has its long-term sovereign credit rating cut to AA- from AA by S&P
? RUSSIA-- The lowest yields on debt compared with equities since 2008 are spurring Russian companies to buy back their own shares with borrowed money.
? CANADA� Canada�s bond market  is having its worst month in almost two years.
? INDIA� India inflation exceeds 9% 10th month amid rate pressure
? GOLD�
1. Gold�s biggest slump in three years means traders and analysts are now the most bullish in three months, speculating that Europe�s debt crisis, slowing growth and a bear market in equities will drive demand for bullion.
2. Gold may surpass $2,000 per ounce for the first time by early next year, as central banks in emerging markets add the precious metal to reserves to diversify away from the dollar.
? COMMODITIES�
1. Baltic Index Reaches 2011 High for Sixth Session on Coal, Grains
2. Gold Traders Most Bullish Since July
3. Commodities Head for Biggest Gain in 6 Months
4. Oil Heads for Second Weekly Gain
5. Copper Rises, Heads for Second Weekly Gain
6. Gold Gains
7. Wheat Gains
8. Coffee Climbs to One Week-High
9. Cocoa Rises


Spain/Italy very much in focus again; meanwhile, French 10yr yields are creeping higher too - Spain was downgraded by S&P Thurs night while both the FT and WSJ have articles talking about how the country will fall short of its deficit targets.  Spain 10yr yields have risen from sub 5% up to ~5.2%+ in just the last few days and Italy continues to creep up towards the danger zone of ~5.83%.  Wire reports suggest the SMP is trying to defend yields but w/the EFSF now operational, many fear how markets will respond if/when the ECB steps back.  Within Italy, Berlusconi faces a key confidence vote which he is expected to survive but markets increasingly view Rome as being politically paralyzed at the moment and unable to cope w/its fiscal stresses.  France 10yr yields meanwhile are creeping higher, rising from ~2.5% back on 9/9 to ~3.08% Fri morning (the French/Bund 10yr yield spread hit a new record).




GLOBAL FX RESEARCH (Jens Nordvig): We have been trading EURUSD from the short side since 25 August. Initially, we expressed our view in spot, but since mid-September (when EURUSD traded to 1.38), our exposure has been concentrated in 2-4 months put spreads. But we now think it is the right time to re-establish short EURUSD spot exposure. The main reasons are as follows: 1) EURUSD has retraced around 4% from the low last week, 2) European policy bazooka is likely to remain undeployed in Q4, 3) Italian yields have again started to drift higher over the past one to two weeks, 4) the trend in global reserve accumulation is looking clearly weaker, and 5) considerable event risk in Greece in the next few weeks. All things considered, we recommend fresh short EURUSD spot exposure at the current level around 1.3725, with a stop at 1.40.  from nomura






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 No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.