ECB Reiterates Quasi-Hawkish Stance

Apr.28.08 | About: iShares Europe (IEV)

In equity news overnight, Germany’s Freenet [FNT.GE] has agreed to acquire Debitel AG [DBL.GE]. Under the terms Freenet will issue 32M new shares to fund the acquisition. As a result Freenet does not plan to a pay a dividend in 2008. Continental Airlines (NYSE:CAL) noted overnight that its board of directors unanimously supports management’s recommendation that the company should not pursue a merger with another airline at the current time. JP Morgan (NYSE:JPM) cut its European banking write down forecast to €6.8B from €8.3B overnight.

In the newspapers, the Wall Street Journal reported overnight that UAL (UAUA) is nearing a decision about its potential merger partner. According to the report, in the past UAL has held detailed merger talks with US Airways (LCC) and Continental Air (CAL). According to the Telegraph the Bank of China may seek to bid for RBS' (NYSE:RBS) insurance units. The Times wrote overnight that Numis Securities is in advanced talks to buy Bear Stearn's UK equities business. According to Der Spiegel, Deutsche Bank (NYSE:DB) is planning a capital increase to raise up to €17B. The article says that Deutsche Bank will seek approval for the issue at its shareholders meeting at the end of May. The company may raise about €4B by the sale of 55M new shares According to the Wall Street Journal Mars and Berkshire Hathaway are close to a deal to buy WM Wrigley (WWY). The total deal could be worth more than $22B. HBOS [HBOS.UK] according to the Financial Times has finalizes plans for a £4B rights issue to boost its capital base.

In energy news overnight, Nippon Oil [5001.JP] plans invest about ¥2B at its Negishi refinery to build a facility that can produce 100K kiloliters of ethyl tertiary butyl ether per year. The Wall Street Journal reported overnight that that investigators have evidence suggesting that agents of a construction consortium led by a former HAL (NYSE:HAL) unit made payments to Nigerian officials. The probe examined payments made in connection to the multi-billion dollar construction of the Bonny Island natural gas plant. Overall the bribery probe has expanded beyond the initial effort to determine if $132M paid by the Halliburton-led consortium to a UK lawyer was used to bribe Nigerian officials. According to Sky News, British Petroleum’s (NYSE:BP) Forties Pipeline system was shut-in Sunday at 06:00. BP's Forties pipeline feed from the North Sea platforms supplies 30% of the UK's daily oil consumption. Nigerian newspaper The Punch wrote overnight that Nigeria’s daily crude production has shrunk to less than one million barrels per day as the result of shut downs at ExxonMobil (NYSE:XOM) and Shell (NYSE:RDS.A), the country’s biggest oil producers. Nigeria’s oil union said later in the session that 860k bpd of Exxon’x Nigerian production is currently halted by ongoing strikes. France’s Total (NYSE:TOT) agreed overnight to acquire Canada’s Synenco Energy [SYN.CN] for C$480M, with the C$9.00/share price representing a 15.5% premium to Friday’s closing price. Responding to a question published in a newspaper report OPEC president Khelil said overnight that he does not rule out oil prices reaching $200/barrel. Khelil added that oil prices are linked to both upward and downward movements in the Dollar. Khelil said that a 1% decline in the dollar means a $4 rise in oil prices. Khelil also reiterated that increasing output will not lower oil prices. Lehman Brothers boosted its 2008 average oil price forecast to $97.50/barrel from $87.50/barrel, and raised its 2009 forecast to $85/barrel from $75/barrel.

In fixed income related news overnight, the Times wrote overnight that according to a British Chamber of Commerce survey, most businesses believe the concerns about the credit crisis are being overstated by the London financial markets. Stephen King, managing director of economics at HSBC, argued in The Independent overnight that, as emerging markets begin to decouple, the lack of a unified price stability goal amongst central banks is making pushing the Fed, BOE, and ECB into an increasingly more difficult position. King points out that emerging markets that force their exchange rates to move in tandem with the dollar, basically leads these countries to import US monetary policy in a situation where they do not require the same policy action. As a result, King argues, we’re experiencing higher demand, and higher inflation pressures worldwide, particularly in food and energy. King says that many emerging markets have chosen to direct monetary policy at the maximization of growth rather than the minimization of inflation, and in the process have unleashed a global inflation threat which is leaking into higher prices all round. King concludes that emerging market developments are impeding the ability of western central banks to deal with the credit crisis as policy makers are torn between fighting off a domestic collapse and combating inflation.

In currencies, the USD was slightly softer during the European morning as ECB members continued to stress their concerns over the inflationary outlook. Front month NYMEX crude tested fresh all-time highs of $119.93 during Asian trading as labor concerns have disrupted about 2.5% global output. The EUR/USD is hovering at 1.5670-level. The Euro encountered some early turbulence on softer regional German CPI data.

In central bank speak, the Swiss National Bank’s Jordan said overnight that the SNB’s current interest rates policy is appropriate, but assured that the SNB will act quickly and flexibly on rates if needed. Jordan forecasted GDP growth of 1.5%-2% in 2008, adding that the outlook for the Swiss economy remains positive. Jordan noted that great uncertainty surrounds current price and growth forecasts and added that inflation risks are to the upside. The ECB’s Trichet said overnight that it is crucial that the ECB sets the appropriate monetary policy based on delivering stable prices, adding that Central bank liquidity operations cannot address underlying cause of financial turmoil. Trichet reiterated that in the market turmoil ECB's strong commitment to preserve price stability is of the essence adding that there is no ground for complacency. The ECB's Liebscher reiterated overnight that second-round price risks demand attention, furthermore noting that inflation risks demand pre-emptive ECB action. France's Economy Minister Lagarde said overnight that the difference between US and Euro-zone rates is too big, and called for a change in rate policy “on one side of the Atlantic or the other.”

On the data front, in the UK overnight April Hometrack house prices posted their first annual decline since February of 2006 coming in at -0.6% m/m, and -0.9% y/y. German state CPI figures are posting significant declines in April from the worrying levels seen in March, with most of the y/y readings noticeably below the 3.0% mark. Some analysts have pointed out that the CPI readings tend to suffer seasonal swings around this time of year, adding that base effects also weighted down on the readings. Also in Germany overnight the May GFK consumer confidence reading blew out expectations, and was accompanied by an upward revision to the back month reading indicating that German sentiment remains strong. Italian business confidence declined to its lowest level since July of 2006 overnight, coming in at 86.9. The Russian central bank raised both its refi and repo rates by 25bps overnight, to 10.50% and 6.50% respectively. Iceland reported y/y CPI at 11.8% for April, its highest level since September of 1990; the m/m reading was the highest since July of 1988.

Comment: Much of the central bank rhetoric overnight in line with what we’ve seen in the past. Namely, the ECB reiterated its quasi-hawkish stance, which to most market participants means no cut, no hike. The decline in the German state CPI readings from the worrying levels seen last month could be a blow to the ECB’s stance, however it is possible that base effects as well as seasonal swings may account for the declines… we’ll have to wait until next month to see. Similarly, the SNB’s Jordan maintained the same “middle of the road” tone that he had the last time that he spoke. Following comments from the SNB’s Roth last week, this seems to indicate that the SNB will maintain a wait-and-see/data dependent stance. Elsewhere, the Icelandic CPI was off the charts, with the m/m reading the highest since 1988, and the y/y reading the highest since 1990. This all comes after the Sedlabanki cut rates by 1 whole point in an inter-meeting move towards the end of March, and by another 50bps in the beginning of April all to stem off inflation and boost the Krona. While policy moves take time to set in, at the going rate, further action cannot be ruled out in Iceland in the coming months. Crude tested and remains within range of the $120-handle. Things appear to be simmering down in the UK, but the resolution to Exxon and Shell’s Nigerian production problems remain a tad questionable at this point.