Indices Fall on German ZEW Data; UK Inflation Slightly Lower

In equity news overnight, Genentech (DNA) and Biogen Idec (BIIB) announced that results from a phase II/III clinical trial of Rituxan in primary-progressive multiple sclerosis did not meet their primary endpoint. The companies will continue to analyze the study results and will submit the data for presentation at an upcoming medical meeting. Delta Airlines (DAL) and Northwest Airlines (NWA) agreed to merge in an all-stock transaction valued at $17.7B. Under the terms Northwest holders will receive 1.25 Delta shares/share, representing a 16.8% premium based on yesterday’s closing price.

On the earnings front, Burberry [BRBY.UK] reported 2H revenues slightly ahead of expectations, and 2H same-store-sales growth of 6% y/y. UK retailer Tesco (TSCO) beat out analyst expectations for 2007 with Revenues of £47.3B, and net income of £2.12B. UK retailer Debenhams [DEB.UK] reported a y/y decline for its 1H net income, as well as a 20bps decline in gross margins, and a 0.7% decline in same-store-sales. Skyepharma [SKP.UK] reported overnight that a study in pediatric Flutiform in asthma met its primary endpoint.

In the newspapers, the WSJ’s Heard on the Street is cautious on shares of Nintendo (NTDOY.PK) noting that some analysts believe that Nintendo's best years of growth have passed, adding that results may also be impacted by the US economic slowdown. The FT followed up on the previously reported plan by Citigroup (C) to sell $12B in leveraged loans noting that the bank is allowing private equity groups bidding for the assets to cherry pick from a wide range of assets with different prices and credit ratings. According to the Telegraph, a Chinese sovereign wealth fund has built up a stake of about £1B in British Petroleum (BP). The stake represents less than 1% of shares outstanding According to the WSJ, the Government of Singapore Investment Corp is "very seriously considering" participating in UBS's (UBS) $15B rights offering. The sovereign wealth fund bought a 9% stake in UBS in December. In an article that cites the company’s Chief Medical Office, the Seattle Post Intelligence reported that: Dendreon (DNDN) will progress with Neuvenge in breast cancer therapy later in 2008. The article also notes that that the company expects to release positive data about its lead prostate cancer treatment, Provenge, later in 2008. According to the FT, Deutsche Bank (DB) has sped up the sale of €36B worth of leveraged debt. The FT noted that Deutsche Bank has been steadily selling some of its leveraged loans since August, and that the sale process was accelerated last month as the price of many of the loans increased following the bailout of Bear Stearns. [Remember that on 4/13 the WSJ said that DB is looking to sell as much as $20B of LBO related debt to a group of investors] According to the Telegraph, one of Barclay's (BCS) SIVs fell into receivership after the value of its assets declined. Accounting firm Deloitte & Touche was hired as a receiver for the fund.

In central bank speak overnight, ECB's Trichet reiterated overnight that swift implementation of G7 goals is crucial, adding that contagion from U.S. housing trouble has made clear how vulnerable the financial system is. Trichet reiterated that inflation is "certainly a problem,” and declined to add anything new on monetary policy. The ECB’s Stark continued with his hawkish rhetoric, adding that he cannot be sure if the current interest rate stance will contain prices. Stark did note however that he believes that the current policy stance is appropriate for the moment. In Australia, RBA Governor Stevens said that the RBA monetary policy will work to cool inflation, adding that mortgage arrears are extremely low. Stevens declined to comment on the RBA’s interest rate. In the minutes from the RBA’s March 31 policy-setting meeting where the bank left rates unchanged at 7.25% as expected, the monetary policy committee said that current rates exert significant restraint. The MPC added that inflation is likely to fall faster than earlier thought, but short-term inflation will remain relatively high. According to a report in El Mundo, some members of the Bank of Spain believe that the central bank is being hard enough with its economic growth forecasts. Some board members believe that the economic crisis facing Spain is more serious than the regulator is saying, adding that the policies adopted to address the crisis are not robust enough the paper said. Swedish Finance Minister Borg forecasted 2008 GDP growth of 2.1%, and 2009 GDP growth of 1.8%, adding that he sees the repo rate steady through 2009 at 4.25%.

In fixed income, Japan sold ¥549.1B in 30-year bonds with an average yield of 2.45% and a bid-to-cover of 3.92x. The cover compares to 3.82x seen at the previous auction. Italy sold €1.95B in 4.25% August 2013 bonds with an average yield of 3.99% and a bid-to-cover of 1.5x, as well as €2.0B in 4.25% August 2014 bonds with an average yield of 4.05%, and a bid-to-cover of 1.64x. The WSJ is running an article about the performance of government-sponsored enterprises [Fannie Mae (FNM) and Freddie Mac (FRE)] could have a direct impact on the US economy and the US' credit standing. The article notes that, according to an S&P report, government-sponsored enterprises enjoy implicit government guarantees and could cause the US to lose its sterling triple-A rating if the government were forced to come to their rescue. The WSJ is also running an interesting article by Harvard professor Martin Feldstein about the recent Fed interest rate cuts. Feldstein ultimately argues that the benefits of recent rate cuts are likely to be small when compared to the potential damage. Japanese insurer Nippon Life Insurance announced overnight that, in an attempt to boost returns, it plans to buy ¥400B corporate debt, asset backed securities, and government bonds. JP Morgan asset’s Donohue said overnight that he sees an ECB rate cut this year. Donohue added that JP Morgan Assets may sell treasuries and buy European debt.

In economic data March RICS house prices in the UK posted their largest decline since 1978, while March BRC same-store-sales declined to –1.6% from 1.5% in February. March CPI & RPI data in the UK fell short of estimates on all fronts, while the February DCLG house prices declined to their lowest level in 18 months. French CPI data for March reached its highest Y/Y level since November of 1991, seeming to confirm the ECB’s most recent inflation projections. Similarly, the Y/Y reading on harmonized CPI was at its highest level since the harmonized readings began in 1996. Final readings on Italian CPI for the month of March confirmed y/y readings at multi-year highs. In Germany, the Zew economic sentiment, which was expected to rise slightly from March, declined to –40.7 in April for its second lowest reading since March of 1993. Similarly the Euro-Zone economic sentiment reading posted an unexpected decline. A Zew economist said after the data release that inflationary pressures have began to dampen German growth. The economist added that GDP growth of 1.7% is still realistic in 2008, and speculating that the EBC may switch its course to cut rates this year.

As we stand now the European indices are currently mixed, with the FTSE 100 outperforming. The slightly weaker than expected reading on CPI data in the UK added some upside momentum to long-gilt and short-sterling futures which are outperforming their European counterparts. The weaker than expected German Zew expectations hit the European indices and the S&P futures (SPY) pretty hard, initially pushing both the Dax and the Euro-Stoxx 50 into negative territory. The data took European fixed income futures off of session lows, but was not enough to push them into positive territory.

Looking ahead, early focus will fall upon earnings results from Johnson & Johnson (JNJ), Forest Laboratories (FRX), Regions Financial (RF), State Street (STT), and US Bankcorp (USB)¸ all of which are expected to report in the pre-market. On the data front March PPI data is due in the US at 8:30 ET along with April empire manufacturing, and will be followed by February net TIC flows data at 9:00 ET. The NAHB housing market index for April is due out at 13:00 ET today. In central bank speak the ECB’s Trichet and Weber are scheduled to speak in Frankfurt at 11:00 ET. After the close earnings reports are expected from Washington Mutual (WM), CSX Corp. (CSX), and Intel (INTC).