Markets Await Mid-Week Rate Announcements

by: John Phillips

The Financial Times wrote overnight that, according to Morgan Stanley, European investment banks are expected to see their M&A and capital markets revenues fall by at least 50% in 2008. The article notes that some analysts had been expecting a 30% decline. In sector rotation overnight, Morgan Stanley cut the European property sector to a cautious rating from an attractive rating.

UBS (NYSE:UBS) reported first-quarter results overnight, with a net loss of CHF -11.5B, which was slightly better than expectations for a net loss of CHF -11.9Be. UBS noted that they plan to cut 2,600 jobs at investment banking unit; Expects to have "5,500 fewer employees by mid-2009", adding that market conditions remain "tough”. UBS also confirmed overnight that they are in talks to sell $15B of asset to Blackrock (NYSE:BLK). Bovis Homes [BVS.UK] said overnight that conditions in the housing market have deteriorated, adding that they see their 1H results significantly below targeted levels. Shares of Tullow [TLW.UK] oil were notably higher overnight after the company announced that they hit a significant column of light oil at the mahogany-2 well. Nicox [COF.FR] traded sharply lower at the open after announcing that phase 2a results of PF-03187207 failed to meet their primary endpoint in a glaucoma study. As a result partner Pfizer (NYSE:PFE) has decided that the compound will be pursued for global development.

In the newspapers overnight, the Times wrote that Barratt Developments [BDEV.UK] is understood to have rejected a stake acquisition offer from Apollo. The article reports that Apollo offered to buy a stake in for a total of around £300M-£400M. Expansion wrote overnight that Iberdrola [IBE.SP] is expected to bid for a stake in British Energy [BGY.UK]. Recall that Iberdrola’s chairman said on 4/15 that the company was looking at British Energy and would make a decision in due time. Alstom [ALO.FR] according to the Wall Street Journal is facing probes by French and Swiss regulators related to bribery allegations.

In energy news, the Wall Street Journal looked at the speculation surrounding production levels at Saudi Arabia's Ghawar oil field. The article porints out that research from Sanford Bernstein showed that only part of the oil field is suffering signs of oil age, adding that the oil field is being properly managed and its experiencing only "mild production-decline rates at worst." Note that the Ghawar field is responsible for about 7% of the world's global oil supply. An analyst at Goldman Sachs said overnight that the possibility of $150-$200/barrel oil prices seems increasingly likely over the next 6-24 months, and as a result raised their 2008 oil price forecast to $108 from $96, and raised the 2009 oil price forecast raised to $110 from $105. According to wire headlines overnight Indonesia mulling the possibility of quitting OPEC as it is no longer a net oil exporter. In an unrelated story overnight the Indonesian Prime Minister said that the government sees an average oil price of $100 in 2008, above the previous forecast of $95. Exxon (NYSE:XOM) provided an update on its Nigerian operations overnight nothing that production has been restored to pre-shut in levels. Royal Dutch Shell (NYSE:RDS.A) also provided an update noting that output is still down by 164K bpd, but is expected to resume partly within days.

In fixed income related news overnight the Greek Central Bank, according to source reports, set the guidance on a new €3.0B 10-year benchmark at +55bps/+58bps vs. the January 2018 Bund. The Independent wrote overnight that repossessions in the UK are set to rise to their highest level in 17 years. The article notes that, on Friday, the Ministry of Justice will reveal the repossession figures for the first three months of 2008. The article speculates that the shortage of mortgage finance, particularly for the 1.4 million homeowners needing to renegotiate fixed-rate deals this year, and the general economic slowdown will almost certainly push even higher the number of families losing their homes. The Independent wrote about the Brazilian economy overnight. According to many analysts, investors believe in Brazil because of its economic growth, price stability, and the recent improvement in public finances. The article notes that the two massive finds off Brazil's Atlantic coast have the potential to catapult the country into the world's top 10 producers over the next 10 years. The article concludes that the question for Brazil now turns from one of stability to one of growth. The Times wrote overnight that as the Bank of England’s rate-setting Monetary Policy Committee gathers this week, its largely united front since the start of the credit crisis last autumn has given way to division. The fraying of the MPC’s consensus means that, despite bleak headlines over economic prospects, most of the City believes that the chances are slight of a back-to-back cut in interest rates on Thursday.

In the currencies, the USD continued its decoupling overnight, seeming to neglect the usual inverse relationships held with certain commodities. The EUR/USD had breached the former option barrier pivot point of 1.5500 ahead of the European open, but regained composure and eventually retested the 1.5450-level. There was continued speculation that the Russian Central Bank might revalue the Rouble when the new Russian government takes control this week. Recall that there have been similar rumors over the past few sessions regarding selling from Eastern European names. Again, dealers noted that the last time the Russian central bank allowed the ruble to strengthen was in August, when the inflation rate was 8.5%; it is now 13.3%. The GBP remained heavy as potential sell stops lurk below the 1.9590-level and appear vulnerable. In related news, a PBOC official said overnight that Chinese FX diversification away from the US Dollar will be small and conservative.

In central bank speak overnight the Fed’s Bernanke said that declines in house prices could affect the real economy, noting that foreclosures are expected to rise in 2008 when compared to 2007. Bernanke said that avoiding foreclosures is a legitimate policy concern. Bernanke did not address monetary policy. Elsewhere, the ECB’s Ordonez reiterated overnight that there are no signs that food price pressures are abating.

Things were pretty dry on the data front, the unadjusted reading on Spanish industrial output for the month of March declined to their lowest level on record at -13.3%. April service PMI readings were mixed in Europe overnight, with readings in France and the UK falling below estimates, while the Euro-Zone, Italy, and Germany all edged out expectations. March PPI readings in the Euro-Zone were roughly in line with consensus expectations and were accompanied by slight upward revisions to the back month readings. There were a few central bank rate announcements overnight. The Royal Bank of Australia left rates on hold at 7.25% as expected. In Asia, the Indonesian central bank unexpectedly raised interest rates by 25bps to 8.25%. Elsewhere, the Romanian central bank raised rates by 25bps to 9.75% overnight; consensus expectations were for a 50bps rate hike. The Turkish central bank announced a rate cut of a different nature overnight, cutting FX rates on the Euro and the Dollar to 1.00% from 2.75%.