European Market Primer: Before Trichet's Speech

Includes: DIA, FXB, FXE, QQQ, SPY
by: John Phillips

In equities news, overnight M&A activity along with poor earnings results were the focus of the session. Royal Philips Electronics reported a 75% y/y decline in first-quarter net income, falling well below analysts’ estimates. Sales results fell slightly below estimates, however the company did reaffirm its 2010 EBITDA margin target of 10%-11%. Groupe Danone opened lower in the session, but pushed higher on the back of a 18.7% y/y rise in first-quarter sales, along with its FY08 revenue growth forecast of 8%-10% and its EPS growth forecast of 15% or more.

M&A news overnight included was varied. Titian Europe elaborated on news circulating this weekend. Titan Europe announced that it was in preliminary talks for the US-based Titan International to acquire the rest of the shares that it does not already own in the company in an all share deal. According to the preliminary terms, the Titan Europe shareholders would receive 1 Titan International share for every 8 Titan Europe shares they own. UK-based industrial holding company Enodis (ENODF.PK) announced overnight that it will be acquired by the US-based Manitowoc for 260p/share, in a deal valued at £948M. Under the terms of the Offer, Enodis Shareholders will receive 258 pence in cash for each Enodis Share. In addition, prior to the Scheme becoming effective, Enodis will pay a dividend of 2 pence per Enodis Share in lieu of an interim dividend in respect of the financial year ending 30 September 2008. Manitowoc expects that the deal will be accretive to earnings in FY09.

Finally, what is, thus far, likely to be the talk of the morning, Blockbuster (BBI) announced that, in a letter to the Circuit City (NYSE:CC) chairman sent on February 17th, it offered to acquire the company in an all cash merger with a price range of $6.00/share to $8.00/share. Blockbuster noted that Circuit City has failed to provide the due diligence necessary for Blockbuster to make a definitive proposal. Blockbuster announced that by releasing this news it believes the shareholders of Circuit City should have the opportunity to participate in determining the destiny of the company.

Following this weekend’s G7 meeting, there was a large handful of central bank speakers on the wires overnight. While much of the commentary from ECB members was in line with recent ECB rhetoric, some of the “less hawkish” members were “stepping it up”. The ECB’s Mersch said that he sees no room for rate cuts, adding that upward revisions to the ECB’s inflation forecast cannot be ruled out. Similarly, the ECB’s Wellink said that there is no leeway for interest rate cuts, while the ECB’s Quaden said that Euro-Zone inflation is not likely to fall into the central bank’s target range anytime soon. Elsewhere, the Swiss National Bank’s Roth said overnight that vigilance is needed on European inflation, adding that Swiss inflation is seen remaining relatively high, but is expected to fall below 2.0% during the second half of the year. Once again, the commentary all follows the G7 meeting this past weekend, where G7 changed its verbal stance on currencies for the first time in around four years.

While the new statement was equally as vague as the previous statement, it did have a more aggressive, definitive tone. Recall additionally that prior to the meeting, the German Finance Minister said on Friday that the Euro at $1.60 massively impacts Germany’s economic interest. While this commentary has been heard and heard again in France, this is one of the first comments of this nature from a ranking German official. All in all, an ECB rate cut is looking less and less likely in 2008, but perhaps some hard-line currency intervention is in the works.

Fixed income futures opened higher in the session on the back of weaker equity markets, but slowly drifted lower throughout the early session. The most movement was seen in long-gilts, which were quickly knocked into negative territory following the release of stronger than expected PPI data for the month of March. There was no new supply in the UK, nor in the Euro-Zone overnight, however the Greek PDMA head did deny the imminent 10-year launch. France, Italy, and Germany will collectively supply €17.5B this week. The Italian auctions are scheduled for Tuesday, with an aggregate €4.0B in 2013 BTPs and 2014 BTPs. Germany will sell up to €7.0B in 2010 schatzs on Wednesday. In France, the AFT will sell €5.0B to €5.5B in 2010 BTAN, and 2013 BTAN, as well as €1.0B to €1.5B in 2013 OATi and 2020 OATei. In the UK, the DMO will sell £2.25B in 2042 bonds in Thursday’s session.

On the data front the Bank of France business sentiment fell shy of estimates overnight, accompanied by a downward revision to the back month reading. Both headline and core CPI data exceeded expectations in Sweden overnight. March PPI data was mixed in the UK. PPI put beat out estimates reaching its highest y/y level since March of 1980. Similarly, PPI output beat out estimates posting its highest y/y read since March of 1991. PPI output core was mixed; the y/y reading edged out estimates, while the m/m reading fell slightly below. In the Euro-Zone, February industrial production data was slightly ahead of estimates, however there were some heavy downward revisions to January’s readings. Finally, Portuguese CPI data for March was slightly ahead of expectations on both headline and harmonized bases, seeming to further confirm the ECB’s inflationary outlook.

In the newspapers overnight, the Guardian said that the Spanish government plans to spend €10B per year on an economic stimulus package. The WSJ said that Deutsche Bank (NYSE:DB) is seeking to sell as much as $20B of LBO related debt to a group of investors. The Financial Times speculates that a merger agreement between Northwest (NWA) and Delta (NYSE:DAL) is imminent.

As it stands now, the European indices are in negative territory, but are off of their worst levels of the session, and could see positive territory if they continue to follow their current path. Fixed income futures are hovering around session lows, recently making their way into negative territory. The European yield curves are relatively flat, while swap spreads have posted a modest rise. Looking ahead, focus is likely to fall upon March advanced retail sales, and February business inventories in the States, as well as comments from the Fed’s Warsh, and the ECB’s Trichet, both of whom are expected to speak in New York later today.