European Market Update

Euro-Zone CPI estimate gives scope for aggressive ECB rate cut; OPEC compliance and Russian-Ukraine dispute help oil move towards $50/barrel

ECONOMIC DATA

(BR) Brazil Dec FIPE CPI Monthly: 0.16% v 0.21%e

(UK) Dec Nationwide House prices M/M: -2.5% v -1.5%; Y/Y: -15.9% v -14.6%e

(FR) French Dec Consumer Confidence: -44 v -44e

(HU) Hungary Nov Producer Prices: M/M: 0.1% v 3.4% prior; Y/Y: 7.1% v 7.4%e

(NO) Norway Dec PMI: 40.7 v 39.5e

(SP) Spain Dec Services PMI: 32.1 v 28.2 prior

(IT) Itayy dec PMI Services: 40.3 v 39.1e

(FR) French Dec PMI Services: 40.6 v 41.6e

(GE) German Dec PMI Services: 46.6 v 46.4e

(EU) Euro-Zone Dec PMI Services: 42.1 v 42.0e; PMI Composite: 38.2 v 38.3e

(UK) Dec PMI Services: 40.2 v 39.0e

(EU) Dec Euro-Zone CPI Estimate Y/Y: 1.6% v 1.8%e

(BR) Brazil Nov Industrial production M/M: -5.2% v -3.5%e; Y/Y: -6.2% v -4.3%e

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

In equities: Imtech [IM.NV] Provided mediterm term outlook. It saw rise in EBITA in 2008 and noted that its order portfolio up 18% y/y at €4.5B. It reiterated strategic goals for 2012 with op margin expected at 6% and sales of €5B. || ASM [ASMI] Signed Certified Manufacturer and Partnership Agreement with SAFC Hitech || Publicis [PUB.FR] CEO Levy saw lower sales in 2009 in a FT interview. Article noted that in an interview with the newspaper, CEO Levy stated that the company's Internet advertising business would grow by ``two digits'' and its activities in Russia and China would go on expanding, though more slowly than last year. Article noted that CEO believed the emerging market growth wouldl compensate for ``a large part'' of the contraction elsewhere, though not for all of it

|| Diageo [DGE.UK] CNBC reported that India's United Spirits slowly proceeding on possible tie-up with company || Television Francaise [TFI.FR] Reportedly in discussions to purchase Group AB.. La Tribune reported that company is in talks to buy Groupe AB, which owns a 40% stake in digital television channel TMC || Next [NXT.UK] Reported H1 SSS -1.9% y/y but noted that its FY profit forecast for the year to January 2009 remained in line with previous expectations. It Reaffirmed FY forecast with profit in line with consensus forecasts of £415M to £435M but added that the 2009 year looks set to be another challenging one. CEO stated on the conference call that product prices seen rising by 5% to 10% in H2 2009 || Debenhams [DEB.UK] Reported 12 week like-for-like sales -3.3% y/y. The company commented that Trading will remain challenging for the entire retail sector. The CEO stated in the conference call that the company gained market share against competitors in Oct and Nov period and added that he expected that trend to continue in Dec || Hochtief [HOT.GE] Reaffirmed its FY08 outlook. The company maintained its earnings forecast for 2008 despite its unit Leighton Holdings Ltd.''s value adjustment of listed participating interests. The groups continues to expect new orders and order backlog above the high prior-year level || Balfour Beatty [BBY.UK] Awarded military housing project at Lackland AFB in Texas. Ci has acquired the interests in both Phases I and II of the 50-year military housing privatization project at Lackland Air Force Base, located in San Antonio, Texas. || Morgan Crucible [MGCR.UK] Increasedits equity stake in NP Aerospace from 49% to 60% for £12.2M || Eads [EAD.FR] Thai Airways stated it would delay payments on 6 A330s aircraft for three months || Experian [EXPN.UK] Forecasted UK retailers available rental space to rise to 10% by Feb. it added that it saw 135K vacant stores by end of 2009, vacancy rates of 15%. Failure of retailers will leave significant gaps in rental space || Renault [COO Pelata: Expected 2009 European car demand to decline 20% to 25% compared to 2007. He added that the company had met its inventory goal for 2008 and planned on further reductions next year.

Speakers: PBoC Advisor Fan Gang noted that China must spur investment to sustain economic growth. The Yuan's recent fluctuations were normal, but did not comment whether the currency would weaken. He noted that the decline in China's fx reserves was due to declines in value of assets held by the central bank. China's fx reserves fell in Oct due to valuation change (this was said to be the first monthly fall since December of 2003) || (IN) Indian Export Group: To miss 2009 export target of $200B citing weakening demand. The export group noted that fresh export orders wer drying up coupled with overseas buyers canceling earlier orders || French Fin Min Lagarde stated that it was difficult to predict when France would emerge and recover from market crisis. She did note that December spending data was favorable on a y/y basis. Private consumption levels remained high throughout Dec and added that French consumers refrained from using credit cards during Christmas season. She commented that lower gas prices were not currently being considered || German Agency commented that it saw demand for labor slowing due to 'difficult' economy ||

In Currencies: The USD continued it form tone against the major European pairs in the session. The EUR/USD hit fresh 3-week lows in the session. Dealers noting that deteriorating Euro-zone economic fundamentals expected to the force the ECB to a more aggressive rate cutting policy and with traders recognizing that December's euro gains had been driven by temporary year-end factors. The lower CPI estimate below the 2.0% ceiling will continue to make the case for any aggressive ECB action. EUR/USD testing below the 1.34 level ahead of the NY morning. The USD was additionally aided by President-elect Obama's $775B stimulus plan. || EUR/GBP cross was again on the forefront of the volatility. Dealer chatter circulated that selling pressure in the cross was due to merger flows. Dealers citing the offer between France's EDF and UK British Energy was declared free of conditions and 'effective' in that €12B deal. ||Former BoE member Willem Buiter said that Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets in a UK newspaper interview. Buiter stated that the long-held assumption that US assets (particularly government bonds) are safe haven will soon be overturned as investors lose their patience with the US economy. || China reportedly planning CNY1T railroad project for 2009

In Fixed Income: Barclays Analyst: Sees risks of 'unruly unwind' of long positions in US Treasury market Q1. The analyst Added that some price gain before 'significant' top and noted that the 10-Year UST yield to retest 2% mark (currently at 2.48%) . The US yield curve flattened during the Asian and European morning. The 2-year US nmote at 0.83 while the 10-year came in at 2.49%. The European curves were modestly steeper during the session.

In Energy: Gazprom Deputy CEO Medvedev stated that Gas via Ukraine was 7-8 times below normal levels. He added that the situation was 'deteriorating' in gas dispute. Only 40M cubic meters are reaching Europe. Energy components rebounded from session lows as dealers asses the implications. Russia reduced natural gas shipments to Europe through Ukraine and deliveries to the Balkans were cut at the Romanian border as a dispute over pricing and transit fees led to a sixth day of supply disruption.|| Ukraine Ambassador to Turkey Korsunsky stated that Gazprom should give Ukraine more fees for gas transit. He added that Ukraine had enough gas to last until April. Ukraine did not shut down Russian gas supplies and asked Gazprom to re-open gas discussions || OPEC Delegate stated that was not been informed over a potential Feb meeting. The delegate commented that organization would cut output again if prices slipped under $30 bbl || Credit Suisse analysts lowered their Global Oil sector outlook to underweight from benchmark || Iran plans to reduce oil supplies to at least two of its Asian customers by 14% in Jan. The cuts would impact Iran's light, heavy and Forozan crude. || Kuwait told at least 2 Asian lifters that it would cut crude supplies by 5% from contracted volumes as of Jan 22

Credit crisis: WSJ 'Heard on the Street' noted that banks with significant losses may soon get a windfall tax. The column noted that the Obama stimulus plan, could include tax changes that could give financials increased tax rebates. Under the Obama plan, businesses may be allowed to write off large losses incurred last year, as well as any losses from 2009, to retroactively reduce tax bills dating back 5 yrs. ||S&P Analysts stated that the Japanese Credit quality has been trending lower since Q3 2008 || (UK) Financial Services Authority confirms short-selling ban to be lifted Jan 16 -Times

NOTES

The lower Euro-Zone CPI estimate heightens the case for additional ECB rate cut in January. The Y/Y CPI came in below the 2.0% ceiling for the first time since August 2007 that ECB members hawkish adhere to. Increased talk that the ECB could cut by 50bp to 2.00%at its Jan 15 policy meeting. Elsewhere in Europe, the PMI services data was a mixed bag but remained at or near all-time record lows for the region. Overall the continued global financial crisis is causing lower economic growth and slowing inflation and poises central banks to continue with their rate cutting habits. The ECB had already cut by 175bps since October

Energy was a focus during Europe. NYMEX Feb crude futures hit one-month highs above the $49.50 level as the OPEC compliance and Russian-Ukraine dispute provided the catalyst for the move towards $50/barrel. The last time the front month futures was above $50/barrel was back on Dec 1st

Looking Ahead:

8:30 (CA) Canada Nov Industrial Product Price M/M: Expectations -1.1% versus 0.0% prior; Raw material Price Index M/M: Expectations -8.5% versus -12.55 prior
10:00 (US) Dec ISM Non-Manufacturing Composite: Expectations 36.5 versus 37.3 prior
10:00 (US) Nov Factory Orders: Expectations -2.3% versus -5.1% prior
10:00 (US) Nov Pending Home Sales M/M: Expectations -1.0% versus -0.7% prior
(RU) Dec Consumer Prices M/M: % v 0.7%e; Y.Y: % v 13.5%e; CPI YTD: % v 13.3%
14:00 (US) Minutes of Dec 16th FOMC meeting

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