European Market Update

Dollar Sentiment Beings to Wan Following Trichet's Comments Yesterday

ECONOMIC DATA

GE Apr Wholesale Price Index: M/M 0.6% v 0.5%e || Y/Y 6.9% v 6.7%e

FR Mar Industrial Production: M/M -0.8% v -0.4%e || Prior revised from 0.3% to 0.5% |||| Y/Y 1.0% v 1.6%e || Prior revised from 2.0% to 2.3%
FR Mar Manufacturing Production: M/M -1.5% v -0.5%e || Prior revised from 0.3% to 0.5% |||| Y/Y 0.4% v 1.7%e || Prior revised from 1.9% to 2.3%

SW Mar Activity Index Level: 123.3 v 123.7 prior || Prior revised from 123.7 to 123.4

NO Apr PPI: M/M 4.1% v 0.8%e || Y/Y 21.3% v 18.0%e (Y/Y highest since 2/06)
NO Apr CPI: M/M -0.1% v 0.2%e || Y/Y 3.1% v 3.5%e
NO Apr CPI Underlying: M/M 0.3% v 0.3%e || Y/Y 2.4% v 2.3%e (Y/Y highest since 8/02)

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

On the whole things were pretty quiet in Europe overnight. In equity news Germany's Allianz (AZ) reports Q1 net income of €1.14B, below consensus estimates of €1.41B, and revenue of €27.7B, above estimates of €27.3B. The company reported a Q1 banking loss of €538M and said that further writedowns cannot be ruled out.

In the newspapers overnight, The Telegraph wrote that EDF [EDF.FR] is set to make a £9B all cash bid for British Energy [BGY.UK]. Business Week made positive mentions on Starbucks (SBUX), A-Power Energy Generation (APWR), and Radioshack (RSH) in its Inside Wall Street section. According to the Financial Times, Citigroup (C) may announce more than $200B in non-core assets that could be sold today. Citigroup's CEO is also expected to confirm his plan to cut the firm's costs base by about 20%.

In energy news, according to wire reports, an OPEC source said that, if oil prices continue to rise, OPEC may need to meet ahead of the scheduled meeting in September. The source said that an output hike in excess of 500K bpd would be necessary to have an impact on the market. According to a press report, the head of Canada's province of Alberta said that if the US follows through with import restrictions on 'dirty' crude from Canada's oil sands, the province will sell its oil reserves to other countries. The US is planning a law that would prohibit federal agencies from buying fuels that are produced with higher greenhouse gas emissions than conventional fuels. According to a press survey of oil and gas executives, it is expected that oil prices will fall significantly by the end of 2008. In a survey of 370 petroleum industry executives, 55% surveyed by KPMG said they think the price of a barrel of crude will drop below $100 by the end of the year and 21% expect oil prices of between $101 and $120.

In fixed income related news, according to source reports overnight, the German banking workers union is demanding an 8% wage increase. The Wall Street Journal wrote overnight that investors have returned to the CMBS market. According to the article investors have started buying billions of dollars in mortgages and debt related to commercial property. In terms of valuation, the WSJ notes that the assets are being sold at discounts ranging from 5% to 20%. The New York Times reported overnight that banks may need to raise more funds in order to meet their revolving line of credit commitments. As the economy slows more, the article said, corporations are starting to tap their revolving lines of credit and other forms of backstop financing. If companies rush to tap their credit lines in large numbers, banks might have to lend hundreds of billions of dollars. According to the Wall Street Journal Iceland's Central Bank, the Sedlabanki, said that the country's financial system remains broadly sound. The central bank added that many of Iceland's worst banking-system fears have come true over the past year, including the depreciation of the Krona, and the cooling in the property market. In a note to clients, a Morgan Stanley analyst wrote that economic data are likely to deteriorate further, sowing seeds of doubt about the ability of monetary policy to stimulate the economy. The note says that 'our U.S. economists expect GDP to shrink at an annualized 2% pace in the current quarter and to broadly stagnate in 4Q08 and 1Q09, following a fiscal stimulus-induced, short-lived 2% growth blip in 3Q08. During this period of economic stagnation, the question whether the Fed's expansionary policy will find traction is likely to stay high on investors' minds, and markets will probably start to toy with the idea of further interest rate cuts.' Jeremy Warner wrote in The Independent that the BOE's rate dilemma has never been more acute as inflationary pressures refuse to abate, and demand higher interest rates, while the slowing economy demands lower rates. Warner says that it would be an exaggeration to say the Bank of England has also lost control of inflation. What is true is that inflation has remained stubbornly above target for virtually all of the last two years, and that's despite the fact that the targeted measure of inflation doesn't include the strongly rising house prices that have ruled through most of this period. If the Bank of England cannot make people believe it has tamed inflation, maybe the Government should try another way. With house prices now falling, surely the time has come to reinclude them in the targeted index.

On the data front the German wholesale price index was slightly higher than expected in April. French industrial and manufacturing production figures declined by more than expected, but managed to remain within recent ranges. All readings were accompanied by upward revisions to the back reading. Norwegian producer prices skyrocketed, reaching 21.3% y/y, which is, surprisingly, only the highest reading since February of 2006. Core CPI in Norway rose to 2.4% y/y, its highest level since August of 2002. As speculated, first quarter mortgage possession orders in the UK posed a sharp rise. Mortgage repossession orders rose by 9% q/q and 17% y/y during Q1 of 2008.

In currencies, dealers noted overnight that the sentiment for the USD has been less positive since the ECB rate decision and press conference yesterday. The EUR/USD approached the 1.55 area, while the GBP/USD held its ground at 1.9500, unchanged opening levels seen in Asia. Dealers noted that the spread between the US and German 2-year notes is widening from lows seen earlier this week. The 2 year spreads is back to -150 and is helping the Euro rebound against the USD. Dealers also noted that, with oil approaching fresh record highs near the $125 level, and equity weakness resurfacing (led by financials), the recent USD bullishness was perhaps premature. Dealers speculated that a consolidation phase is more likely to be the upcoming scenario for the USD-related pairs. The risk aversion theme helped the JPY and the CHF firm overnight. Commodity related pairs were mixed as USD/CAD firmed by 80 pips to 1.0090, while the AUD/USD is off 30 pips at 0.9414.

In central bank speak an Icelandic Central Bank Economist said overnight that Iceland is on very dangerous terrain. He added that Crown stabilization is the main problem, and speculated that Euro introduction would probably stabilize Iceland economy. In the ECB's Q1 Banking Survey released overnight banks said that they toughened standards for household mortgages in 1Q. Banks said that demand for loans to enterprises and for house purchases fell in Q1, adding that consumer demand for loans was unchanged in Q1. Banks expect tightened credit standards in Q2, and see stronger consumer credit tightening in Q2. China's Vice Premier Wang said that inflation and investment are big problems, noting that China will stick to tight monetary policy. Wang added that the falling USD and declining interest rates are both risks to Chin, adding that China must face challenge of global slowdown. Furthermore, Wang said that China must accelerate FX rate and reserve management reforms.

Looking ahead, economic data will kick off with the April jobs data in Canada. The Canadian jobs data is usually released ahead of the US jobs data, but comes a week later this time; normal scheduling will fall back into place next month. In the US there is only one piece of economic data scheduled today, the March trade balance, which is due out before the open. As expected, earnings will slow down today, however there are a few big names due out in the pre-market today including Clear Channel Communications (CCU), and Huntsman (HUN).

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