European Market Update

European PMI continue to register 'all-time' lows; Equities market stage 'relief rally' on chatter of Chinese rate cut rumor

ECONOMIC DATA

(FR) French Oct Consumer Spending M/M: -0.4% v -0.5%e; Y/Y: 0.7% v 0.9%e
(FR) French Nov Preliminary PMI Manufacturing: 37.9 v 40.0e; lowest reading on record
(FR) French Nov Preliminary PMI Services: 46.6 v 47.0e; lowest reading on record

(GE) German Nov Advanced German PMI Manufacturing: 36.7 v 42.0e
(GE) German Nov Advanced PMI Services: 46.2 v 47.5e

(IT) Italian Sept Retail Sales M/M: 0.0% v -0.2%e; Y/Y: 0.5% v -0.7%e

(EU) Nov Advanced PMI Manufacturing: 36.2 v 40.5e; Advanced PMI Services: 43.3 v 45.0; Advanced PMI Composite: 39.7 v 42.8e

(JP) Japanese Cabinet Office Monthly Economic Report: Cuts its view on Economy for the 2nd straight month; Cuts export outlook to “Decreasing” from “Declining Moderately”

(UK) CML: Q3 repossession claims 38.5K, up 9% y/y; mortgages at least 3-months in arrears at 1.44% v 1.33% m/m

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

In equities news overnight: Citigroup [C] C: Reportedly could be looking for new investors, merger opportunities,. The Board will hold formal meeting on Friday || Basilea Pharma [BSLN.SZ] Receives positive EU opinion regarding its Zevtera drug used for the treatment of complicated skin and soft tissue infections || Wavecom [AVM.FR] Announced it would hold a special shareholders meeting on Dec 8th. The firm would ask permission to issue special shares and issue double voting rights for investors of longer than two years || Zurich Financial [ZURN.SZ] Purchased the remaining 34% stake in Russia's Odo Nasta Insurnace for $205M || ING [INGA.NV] Announced it has reached an agreement with Stichting over life insurance dispute for EUR365M. Class action suit against Nationale Nederlanden has been terminated. || Anglogold [ANG.SA] Signed $1B loan facility with Standard Chartered Bank to refinance its convertible bond. || Barco [BAR.BE] sold its advanced visualization business to Japan's Toshiba; terms not disclosed. It expected the deal to be completed within a few months || Volvo [VOLVB.SW] CEO noted in a German interview that he sees wave of consolidation for truckmakers worldwide; declines to give 2009 guidance. The CEO added that he saw hard times continuing for 12 to 24 month period || Thales [HO.FR] Executive called recent press reports of potential asset swap with Safran [SAN.FR]as 'speculative' || Medilin [MED.GE] Announced a capital increase; to issue 15.75M new shares || Commerzbank [CBK.GE] Reiterates that Dresdner takeover remains on track; No aware of any Chinese takeover plans. It added that it expected German 2009 GDP to contract by 1.2% || Glaxo [GSK.UK] Signed cooperation agreement with Neptunus for co-development of flu vaccine

Speakers: ECB's Nowotny reiterated that there was potential for additional rate cuts, Believes ECB should preserve firepower to use when necessary. Strong indications that interest rates were justified. The Dec staff forecasts could show that inflation could fall within the 2% target by end of 2009/early 2010 and added he did not see any prospects for deflation. He noted that an economic recovery could begin by H2 2009 and added that “Substantial' growth could return in 2010. However, at this time one must expect a significant worsening in labor market in 2009 and disturbing developments for growth and employment was the gravest financial crisis since 1945 and interest rates must reflect if both economic and inflationary expectations stay down. The inherent danger for inflation is that oil price surge in 2010 due to economic expansion. Ther are some initial signs of stabilization returning to financial market crisis but real economic crisis worsening and would feed back into financial crisis as there are some deterioration of credit situation in Euro-Zone. The weaker USD was no help to Euro-Zone, but did tame inflationary expectations. The fundamentals suggest a firmer USD would not be a long-term issue. || ECB's Mersch noted that he was not optimistic on Euro zone Q4 growth front. He reiterated comments made in NY on Thursday that a 'large' interest rate cut could be counterproductive|| ECB's Weber Reiterated his recent comments from earlier this week that the economic outlook has deteriorated at 'rapid' pace and that the added that the ECB has room to cut rates further if necessary

|| (GE) German Fin Min stated that he saw a further slowdown in Germany's economic activity and added that it would be coupled with a deteriorated outlook for exports in 2009 . the weaker economy would hurt labor market in 2009 but labor market is currently in robust shape. Private consumption weakness continuing for some time and could not provide any reliable forecast yet for German govt's 2008 new debt. || BoJ Shirkawa stated that interest rate cuts would not resolve imbalances and that additional rate reductions could cause problems. Monetary policy cannot prevent economic adjustment. Must monitor secondary deflation effects. He added that the global markets remained under pressure as the corporate environment continued to deteriorate. He added that that large companies found difficulty in securing borrowing easily as weaker banks cannot pass through rate cuts. Global market turmoil impacting Japanese financial markets || Turkish Central Bank noted that falling prices and weakening Lira would lower current account deficit. The central Bank would continue to be in position to meet countries liquidity needs and take additional measures to support FX liquidity, || Japanese Cabinet Nov Monthly Report noted that downward pressure on economy was increasing rapidly' and cited that the deepening financial crisis was spreading to Asia. This is the sixth downgrade on its economic view this year and Japanese Gov't added that the next cut in assessment may be only a matter of time. || UAE Central Banker Al-Suwaidi stated that the global crisis would impact its economy but not oil. He saw the UAE economy growing slowing to around 4% and added that inflation has decreased 'tremendously'

In Currencies: Dealer chatter of potential emergency central bank meetings taking place on Friday. Rumor that China's PBoC could cut their interest rates by 54bps today complimented with vague chatter of an 'emergency' Fed meeting making the rounds as well. These stem from the fact that the SNB cut by 100 bps on Thursday, prompting renewed speculation that other central banks would act following last weeks G20 summit. The USD is encountering some week-ending profit-taking aided by the rising stock markets this session and comments from ECB officials warning that large interest rate cuts could be counterproductive. Overall the EUR/USD maintaining its 1.24 to 1.28 trading range and it is ending the European mid-morning at 1.2590 area. Dealers noting that the pair has been unable to make fresh lows since testing 1.2330 back on Oct 27th. Thus it has been some 16 trading sessions without making a new low and making some case to retest the upper end of it consolidation range. The USD and JPY are softer in the European session as it continues to be influenced by equity price movements. USD/USD at 95.20 and EUR/JPY cross at 119.80, firmer by around 300 pips. GBP/USD was just below the 1.50 handle, up 230+ since the Asian open.

In Energy: Statoil [STL.NO] Angolan Gimboa Field to commence in January; to increase its Angolan output to 250K bpd from 200K bpd || China could adjust its fuel pricing system to use 'refinery gate' price as a basis. The plan would allow refiners to sell fuel at about 4% above the refinery gate price and some costs. || Arab Monetary Fund Gen Dir stated that Arab countries need oil prices at $40-50/barrel range to fulfill budget requirements.

In Fixed Income Supply: Bund futures have rallied into the release of PMI data but are off highs, despite the fact that data came out weaker than expected. || iTraxx Crossover Index traded at 935bps, +8bps for a fresh all-time high

NOTES

The market is all about confidence and in particularly, banking is all about confidence and the sentiment among dealing desks is that one cannot buy confidence or produce it. Thus the focus has been on Citigroup [C] and chatter that it might be looking for new investors or merger opportunities. The USD encountered some week-ending profit-taking aided by comments from ECB's Mersch who noted that large rate cut would be counterproductive. The Japanese Nov Government report noted that the deepening financial crisis was spreading to Asia as it again downgraded its virew on its economy and its export sector. The global recession concerns are highlighted by the recent steel production statistics, which saw a decline of 12.4% in Oct from year-earlier levels with China output portion down 17%. Y/Y. The European PMI for November continues to exhibit all-time lows since records began a decade ago.

Looking Ahead:

6:30 (EU) ECB's Gonalez-Paramo to speak in Madrid
7:00 (CA) Canada Oct CPI. M/M consensus expectations are -0.6% ; The prior number was 0.1%. Y/Y Consensus expectations are 3.1%; The prior number was 3.4%
7:00 (CA) Bank of Canada CPI Core. M/M consensus expectations are 0.0% ; The prior number was 0.4%. Y/Y Consensus expectations are 1.9%; The prior number was 1.7%.
8:00 (EU) ECB's Trichet to speak in Frankfurt
8:15 (US) Fed's Lacker to speak in Maryland
12:15 (US) Fed's Plosser to speak in Philadelphia
12:40 (US) Fed's Evans to speak in Indianapolis

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