European Market Update

US Auto bailout dead or is backroom bargaining still going on? Risk Aversion theme back in play

ECONOMIC DATA

(IN) India Oct Industrial production Y/Y: -0.4% v 2.1%e

(FR) Nov Bank of France Business Sentiment: 68 v 75e
(FR) Oct Current Account: -€5.0B v -€4.0B prior

(SP) Spanish Nov CPI M/M: -0.4% v-0.4%e; Y/Y: 2.4% v 2.4%
(SP) Spanish Nov CPI- Core Index: M/M: 0.3% v 0.3%e; Y/Y: 2.7% v 2.7%e
(SP) Spanish Nov CPI - EU Harmonized M/M: -0.4% v -0.4%e; Y/Y: 2.4% v 2.4%e

(CZ) Czech Oct Industrial Output Y/Y: -7.6% v 8.9% prior; Industrial Sales Y/Y: -7.9 v -8.3%
(CZ) Nov PPI M/M: -1.9% v -0.9%e; Y/Y: 1.2% v 2.6%e

(IT) Italian Q3 Labor costs Q/Q: 1.2% -1.0% prior; Y/Y: 6.2% v 3.1% prior

(SP) Spain Oct Arrears Ratio 2.91% v 0.89% y/y

(UK) Nov UK House Prices M/M: -1.7%; Y/Y: -8.2% - UK press

(EU) Euro-zone Q3 Labor Costs Y/Y: 4.0% v 2.8%e
(EU) Euro-zone Oct Industrial Production M/M: -1.2% v -1.0%e ; Y/Y: -5.3% v -3.8%e

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

In equities: HBOS [HBOS.UK] Provided a trading update ahead of its acquisition by Lloyds. HBOS guided FY08 YTD impairment charge of £3.3B. It noted that it is operating in increasingly difficult conditions which have seen corporate credit conditions continue to deteriorate significantly since November. It estimated unsecured lending impairment of £1B, says in light of the worsening economic climate, trends in Retail impairment charges are likely to come under further pressure. Wholesale funding costs remain highand that its exposure to monolines insurers was £1.1B at 30 Nov 2008 || Erste Bank [EBS.AS] EBS.AS: Confirmed it FY08 forecast and added that they see a higher 2009 profit. It guided FY09 Op profit +10% y/y || Sportingbet [SBT.UK] Stated that its trading was in line with prior expectations || Central African Mining [CFM.UK] Received positive Initial Assay Results. It noted that 68 drill holes have now been completed on Mukondo of which 11 have now been independently assayed by Set Point Labs in Johannesburg, South Africa || UBM [UBM.UK] Guided FY08 revenues in line with expectations. It noted that it would cut 350 jobs in H2 of FY08 (5% of workforce). It added the company remained fully prepared to take advantage of emerging opportunities to develop our business, both through organic expansion and by acquisition || QMED [QMED.SW] Confirmed that Ivytan AB SEK39/shr offer for firm has been withdrawn || Aggreko [AGK.UK] Q4 trading remains strong with Rev +48% y/y || Charter [CHTR.UK] Stated that its underlying earnings for 2008 are in line with expectations || Alcatel-Lucent [ALU.FR] Sought to achieve €750M savings in Q4 and to lower breakeven by €1B. It announce a reduction of 1K management jobs (1.3% of workforce) and 5K contractors || Novartis [NOVN.SZ] Study showed that FTY720 had Superior Efficacy To Interferon for multiple sclerosis || Mazda [7261.JP] Reportedly would cut production by no less than 100K units in Japan . It likely to halt production at its Hiroshima facility for 2 days and suspending its night shift operations || Bayer [BAY.GE] Healthcare and Crop Science units to achieve targets

Have 50 projects in pharma pipeline,. Its 2008 R&D budget stands at €2.8B. It noted that it had seen considerably weaker sales in materialscience unit over the past two months. Growth to be achieved in 2008 and 2009 but preparing further measure for slowdown such as temporary plant shutdowns || Coca Cola Hellenic Bottling [EEEK.GA] Named Robert Murray new CFO, effective Jan 1, 2009

Speakers: Japan formally announced its ¥23T stimulus plan. It would set aside funds in amount of ¥12T for bank recapitalization, this is above the ¥2T prior. Japan would spend ¥6T on "quality of life measures", ¥13T on financial support measures| ECB's Mersch noted that the ECB must preserve monetary policy's effectiveness. He commented that the 175bps of rate cuts enacted from Oct have been extraordinary but does not indicate any new rhythm to ECB's policy. Mersch added that will do what is necessary in January and that the ECB does have room to maneuver and is data driven. However, he reiterated view that ECB never pre-commits to rate decision. Earlier in Asia ECB's Mersch noted that inflation could decline below 2% in 2009 and reiterated that growth risks remained on the downside and that the global economy to remain weak in coming quarters . He commented that the lower inflation was due to drop in commodity and energy prices. Financial market volatility could dampen global demand for extend time and that uncertainty over global financial turmoil remained high ||Japanese Fin Min Nakagawa reiterated G7 view that abrupt currency movements are undesirable. Monitoring currency markets with great interest citing that abrupt FX moves could have economic consequences. However. He did note in Asia that was not considering currency intervention at this time but added watching markets with great interest || EU agreed to implement its €200M stimulus plan, which is around 1.5% of Euro-Zone GDP || Japan's MOF Shinohara (Top currency official): Called the moves in JPY as too volatile and excessive and would take appropriate action in currency market || Japan PM Aso stated that he hopedthe BoJ could add liquidity to the market. The PM also stated that he sought to raise consumption tax in three years || German Chancellor Merkel noted that Germany could consider new stimulus measures ||

In Currencies: Risk aversion was in full bloom ahead of the European morning following the US Senate inaction on any potential US auto bailout. The JPY exhibited strength in the aftermath of the Senate failure to bring the auto bailout to a formal vote. USD/JPY tested 988.22 in late Asia and EUR/JPY cross dipped to 117.55 area. The market encountered some consolidation of the extreme price moves after Japan announced its ¥23T stimulus plan. As the NY morning approached the USD/JPY is holding above the 90 level and EUR/USD is hovering around the 1.3320 area. Euro aided by comments from ECB's Mersch in which the ECB must preserve monetary policy's effectiveness and that the 175bps of rate cuts enacted from Oct have been extraordinary | Price action, time of year, uncertainty will make Friday even thinner than usual as day winds on

In Fixed Income: UST's hit multi year lows in the immediate aftermath of the failed Senate vote , but have reversed some of their gains in early European trading. The 2y note is back above 0.70%, the 10y note is back above 2.50% and the 30y back above 3.00%. There were mixed signals in EUR perhiperals. Italy sold 999M 4% 2012, €1.45B 4.25% 2014 and €1.4B 4.75% 2023 BTPS, with results coming in towards to top end of the range of expectations. Meanhwile the yield on the Greek 10y widened to a record 203bps over Bunds . Yields are lower across the curve in Germany and the UK, with a steepening bias owing to better buying in the short end ||| iTraxx Crossover opened around the 1,070bps area, higher by 30 bps, iTraxx Europe 10bbps wider at 210bps || Italy to sell up to €2.5B 4.25% 2014s; €1.5B 4.75% 2023 and 4% 2012 BTP's

In Energy: China's Energy Administration Dir noted that China could face an energy surplus due to slowing demand citing "sizable capacity expansion" for coal and fuel ||Goldman Sachs analyst guide 2009 average oil price $45/bbl, down from $85/bbl || Goldman Sachs analysts cut outlook on basic metals sector.

NOTES

The question begging ahead of the NY morning is whether the US Auto bailout dead or is backroom bargaining still going on? Dealers in Europe pondering if lawmaker tolerance reached at automakers or is this part of the politics at play. The initial reaction in late Asia was one of risk aversion as Far East bourses closed sharply lower on the news. European equity exchanges are lower but off their worst levels seen on the open. The current call for the U.S. markets is for a weaker open. Bond yields are lower. Gold and oil prives are lower. The JPY rose sharply against the major pairs and commodity-related currencies. ||Japan's MoF not satisfied with the JPY appreciation and recent high volatility. Global markets seemed to take a pause after Japan formally announced its ¥23T stimulus plan during the European session. Dealers are taking note of the recent sharp drop in Russian currency reserves. One dealer pointed out the situation that Russia now faces in which defending one's currency can be expensive, but there are significant costs in backing away.

Looking Ahead: Key data Friday include U.S. PPI data, retail sales and the university of Michigan sentiment index

8:30 (CA) Canadian Q3 Capacity Utilization Rate: Consensus expectations are 78.3% ; The prior number was 78.9%.
8:30 (CA) New Motor Vehicles Sales M/M: Consensus expectations are -1.0% ; The prior number was 2.5%.
8:30 (US) Nov Producer Price Index: M/M consensus expectations are -2.0%; The prior number was -2.8% . Y/Y Consensus expectations are 0.2%; The prior number was 5.2%
8:30 (US) PPI - Ex food & Energy: M/M consensus expectations are 0.1% ; The prior number was 0.4%. Y/Y Consensus expectations are 4.2%; The prior number was 4.4%.
8:30 (US) Nov Advance Retail Sales: Consensus expectations are -2.0% ; The prior number was -2.8%. Retail Sales Less Autos : Consensus expectations are -1.8% ; The prior number was -2.2%
10:00 (US) De Preliminary U. of Michigan Confidence: Consensus expectations are 54.5 ; The prior number was 55.3.
10:00 (US) Oct Business Inventories: Consensus expectations are -0.2%; The prior number was -0.2%.

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