European Market Update

Risk aversion back in a big way; Companies continue to announce plans to reduce output and employment

ECONOMIC DATA

(GE) German Oct Producer Prices M/M: 0.0% v -0.7%e; Y/Y: 7.8% v 7.3%

(SZ) Swiss Oct Trade Balance: CHF1.84B v CHF1.28Be; Exports: -4.6% v -8.2% prior; Imports: -5.5% v 5.8% prior

(HK) Hong Kong Oct CPI - Composite Index: Y/Y: 1.8% v 1.9%e

(NE) Netherlands Oct Unemployment Rate: 3.8% v 3.8%

(IT) Italian Sept Industrial Orders M/M: % v -4.2%e; Y/Y: % v -6.4%e
(IT) Italian Sept Industrial Sales M/M: % v -0.8%e; Y/Y: % v 2.3%e

(UK) Oct Retail Sales M/M: -0.1% v -0.9%e; Y/Y: 1.9% v 1.4%e
(UK) Oct Public Finances (PSNCR): -£-4.9B v -£2.5Be;Net Borrowing: £1.4B v £0.4B
(UK) Oct Preliminary M4 Money Supply M/M: 2.3% v 0.8%e; Y/Y: 15.1% v 12.7%e

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities: Air France KLM [AF.FR] Reported Q2 Net €244M below estimates of €260M. It revenues of €6.69 were slightly above consensus expectations of €6.62B. The firm lowered its 2008/09 , cuts 2008-09 operating income forecast but added that it saw it FY08 bottom line 'clearly in profit'. The company announced plans to cut fleet spending by €1.63B over three years and increase cost savings plan by €260M in FY08. Its current forecasts assume no further deterioration in market || Rolls Royce [RR.UK] Announced plans to cut 1.5-2K jobs worldwide in 2009, which is roughly 5% of workforce. Reductions to be across various sectors and functions on worldwide basis and the company cited delays to Airbus A380 and Boeing 787 programs. However, the plan would not affect its 2008 financial guidance || Ahold [AH.NV] Reported Q3 Net €195M above €188M estimates and revenues of €5.81B compared to consensus estimates of €5.59B. || VoestAlpin [VOE.AS] Reported Q2 Net €257.6M slightly above the €253.5M estimates. EBIT €427.9M versus €424.2M estimates. Rev €3.23B v €3.1B estimates.. It reaffirmed FY08 outlook and added that risks from current economic slump are manageable. However, it expected current downward trend to sharpen. CEO stated that it was cutting FY steel division production by 3% to 5% || Nordex [NDX1.ge} Reports Q3 EBIT €21.0M compared with v €20.0M estimates. ; Revenues were at €315.2M inline with €315.0M estimates. It reaffirmed FY08 targets and Guided 2009 revenues up 10-15% which calculates to €1.21B to €1.27B based on 2008 guidance)) v €1.43B estimates || Halfords [HFD.UK] Reported H1 Net £35.2M slightly above year-ago levels of £33.6M. Revenues were £407.1M compared to £400.7M y/y and reaffirmed FY targets. H1 like-for-like sales were down 1.1% y/y. the company noted its performance had remained resilient to the economic slowdown, but is not immune and added it saw continued improvement in gross margins || Daily mail [DMGO.UK] Reported FY08 Pretax £262M above estimates of £248M. with revenues at £2.31B versus £2.28B estimates. Short term outlook remains difficult and was taking decisive action to defend profitability and confident that the group would emerge well from the current economic downturn. || IG Group [IGG.UK] Provided a trading update. It Guided H1 Pretax £58M against £63M estimates and Rev £125M versus £115.0M estimate (1 est). Trading conditions had been strong in the period and the group have continued to achieve high levels of growth and noted that that increased volatility in October had contributed to the bottom line || Hochschild [HOC.UK] Delayed its San Felipe zinc project an would cut 150 corporate positions. However the company reaffirmed 2008 production targets of 26M silver equivalent oz || Sandvik [SAND.SW] lowered its production capacity and costs coupled with an addition round of jobs cuts of 1.5K (approximately 3% of workforce). -The company added that it could not rule out additional steps later on as market weakening had accelerated in Q4 || Repsol [REP.SP] Strength in share price attributed to renewed chatter on stake interest with Lukoil mention as interested in a 30% stake (Gazprom was another previously). Peugeot [UG.FR] Reportedly seeking 3,500 voluntary redundancies (less than 2% of workforce) and added that it expected a 10% decline in European deliveries in 2009 || Tullow Oil [TLW.UK] TLW.UK: Confirmed successful well exploration in that its Ebony-1 well offshore Ghana had hydrocarbons || General Electric [GE] In talks with sovereign wealth funds according to FT Deutschland. Artcile noted that GE seeks government funds to become stockholders and project partners. GE is talking with 4 sovereign wealth funds including Singapore and China. || Gazprom [GAZP.RU] Reportedly cuts its 2008 production to 552-553 BCM from 561 BCM prior|| Uralkali [URKA.RU] Cuts its 2008 production outlook by 10% and reduced revenue guidance by $650M citing a Situation that will remain unfavorable through early 2009. It canceled all overtime work and suspended its employee bonus plan || Dexia [DEXB.BE] EU approval of Belgian and French guarantees does not include provisions for capital increase. || GlaxoSmithKline [GSK.UK] Cervarix vaccine for cervical cancer selected by Netherlands NVI. Netherlands seeks to vaccinates all 12-year old girls. || straZeneca [AZN.UK] Reportedly to cut 600 full-time jobs over 2 years in Sweden (less than 1% of workforce). Will move some Swedish operations to US and S America. Sets net reduction of 1,400 positions by 2013. To close three sites in Spain, Belgium and Sweden

Speakers: ECB's Bini Smaghi: More interest rates cuts are possible; but rates too low for too long could lead to the next crisis. He added that the ECB was not anticipating a deflationary process but was projecting that the Euro-Zone inflation would decline towards the 2% target. Thus he reiterated that maintaining price stability remained ECB's top priority. On the current economic outlook he noted that a recession possibility was a global phenomenon and that no one expected the abrupt economic slowdown|| ECB Nowotny stated that the EuroZone slowdown and easing inflation would provide room for further interest rate cuts. He added that Germany had a lot of room to maneuver for stimulus package. He denied that ECB is 'behind the curve' in following other central banks in lowering interest rates || South Korea Fin Min Choi: Gov't stated that excessive volatility in FX markets would not be tolerated || BoE Chief Economist Dale stated that the recent decline in Sterling FX rate should support UK export marklet. He added that the BoE could cut interest rates if needed to keep inflation on target.

In Currencies: risk aversion has been seen in overnight trade, and more of the same can be expected today. The USD and JPY continue to reflect the equity price movement in terms of theme. EUR/USD at 1.2500 and USD/USD retested the 95.00 historical pivot point.

Commodity currencies will remain vulnerable, amid new reports of mine closures and production cutbacks in energy and metals. The CRB index hitting fresh trend lows on yesterday.

HKMA was also intervening as well, continuing action that began last week but the HKMA was preventing HKD strength and defending the peg as the HKD serves as a defacto replacement for the USD as a safe-haven status.

Fixed Income:

Energy: Reportedly, the Chinese government may increase its existing refined oil consumption tax and not impose a new fuel tax || Sanford Bernstein analyst amends oil demand growth forecast. -Analyst sees 2008 oil demand falling by 260K BPD and 2009 oil demand falling by 600K BPD. By 2010 oil demand would rise by 620K bpd. NY Times reported that Iran said to have enough nuclear fuel for one weapon, not sure if can 'purify' the fuel into warhead design . the article stated that Iran has now produced roughly enough nuclear material to make, with added purification, a single atom bomb, according to nuclear experts analyzing the latest report from global atomic inspectors. Lastly the article cautioned that the Iranian milestone was mostly symbolic, because Iran would have to take additional steps.

Commodities: Rio Tinto [RIO.UK] Canceled purchase of majority stake in an Australian coal deposit || Nymex crude prices near $52; copper trading at a four-year low and aluminum at three-year lows.

Credit Crisis: European Bank for Reconstruction and Development (EBR) increased its 2009 spending by 20% to €7B in response to financial crisis || IMF approved a $2.1Bloan late yesterday (as expecte). Finland, Sweden, Norway and Denmark will provide a further $2.5B in aid

Notes

Risk aversion; de-leveraging and demand for the liquidity of the relative safe haven of U.S. Treasury markets highlighted the European morning. The U.S. 2-year T-note hit a record low on lack of any US auto bailout plan and dealers noting that diminishing chances of any bail-out funds this year as the House adjourns later today. Equities markets continue their spiral downward with no sector unscathed. One dealer noting that the 'good news' is that larger percentage declines are becoming smaller point losses. Global companies continue to announce production cuts as global recession fears mount. Rumors of GM halting its china production circulated. The IFO stated that its Q4 sentiment data has signaled a global recession. Now the fallout factors and potential domino effects are on high alert. Ecuador is seen likely to suspend its debt payments.

ECB members continue to note a possible rate cut is forthcoming, but they are likely behind the curve at this point.

Looking Ahead:

8:30 (CA) Sept Canadian Wholesale Sales : M/M consensus expectations are -0.6%; The prior number was -1.5%.
8:30 (US) Initial Jobless Claims w/e Nov 15 : Consensus expectations are 505k; The prior number was 516k. Continuing Claims w/e Nov 8: Consensus expectations are 3.9M ; The prior number was 3.897M.
9:00 (BE) Belgian Nov Consumer Confidence. There are no consensus expectations for this number; The prior number was -17.0.
10:00 (US) Nov Philadelphia Fed. Consensus expectations are -35; The prior number was -37.5.
10 :00 (US) Oct Leading Indicators. Consensus expectations are -0.6%; The prior number was 0.3%.

Speakers

8:00 (US) Bundesbank's Kotz speaks in Frankfurt
9:30 (EU) ECB's Weber speaks in Frankfurt
9:30 (GE) Chancellor Merkel, Finance Minister Steinbrueck to speak at World Bank Forum on Asia
10:00 (US) Fed's Parkinson to testify before House Agriculture Committee on derivatives
10 :00 (US) Fed's Kroszner, Treasury's Ramanathan testify before House Small business Committee

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