UK Data Renders BOE Cut More Likely; Euro-Zone Retail Sales Lowest on Record

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Includes: EWU, IEV
by: John Phillips

In equity news a series of notable European companies reported overnight. Electricite de France [EDF.FR] reported Q1 revenue in line with expectations at €18.3B, and reaffirmed its FY08 forecast. Total (NYSE:TOT) reported Q1 net income in line with expectations of €3.25B, and revenue of €44.21B, ahead of the €42.03Be consensus estimate. Tui [TUI1.GE] reported Q1 revenue of €5.1B, just above the €5.0B consensus estimate. British American Tobacco [BATS.UK] reported Q1 revenue of £2.54B, pretax of £871M, and operating profit of £807M, all of which were ahead of expectations. Alstom [ALO.FR] reported FY08 net income of €852M, above the €816Me consensus estimate, and revenue of €16.9B, which was slightly ahead of estimates. Commerzbank [CBK.GE] reported Q1 operating profit of €435M, and net income of €280M, both of which were in line with estimates. The bank took a €244M hit in Q1 as the result of the market turmoil and said that reaching results that are in line with those of 2007 will be difficult in 2008. KBR (NYSE:KBR) announced overnight that it plans to acquire the privately held BE&K, Inc. for $550M. BK&E had revenues of $2B for the year ended March 30, 2008, serves both domestic and international customers, and employs roughly 9,000 people. BE&K's international operations are located in Poland and Russia. MBIA (NYSE:MBI) said overnight that it has ample liquidity to meet normal operating expenses, noting that it is too early to say slowing deterioration will continue. MBIA sees no need to raise dilutive equity capital.

In the newspapers overnight the Financial Times reported that one of UBS's (NYSE:UBS) most senior private bankers has been detained by US authorities in a tax evasion probe. Officials are probing if UBS helped US clients evade taxes. The Times wrote overnight that WPP Group [WPP.UK] may make a hostile approach for Taylor Nelson Sofres [TNS.UK] The Wall Street Journal noted overnight that the rising costs of high-fructose corn syrup may lead to soft drink makers increasing their use of sugar in beverages - WSJ According to the Financial Times Airbus [EAD.FR] has ended talks regarding the possible sale of two of its French plants. The New York Times reported overnight that Take-Two’s (NASDAQ:TTWO) Grand Theft Auto 4 had first week sales of $500M, which was above analysts’ expectations Il Sole reported overnight that JC Flowers is interested in buying Banca Italease [BLT.IT] In the Heard on the Street column the Wall Street Journal questions whether or not Fannie Mae (FNM) will need to raise more capital. The article questions if the recently announced $6B capital raise by Fannie Mae will be enough to shore up its balance sheet. Some bears believe that Fannie may need to raise between $5B-$15B in added funds. The article notes that Fannie's $12.2B (the firm's total net worth) effective balance-sheet cushion against future losses is equal to only 1.4% of the firm's $866.7B in assets. Furthermore the article notes that if Fannie's losses continue it may face pressure to create a special reserve against portions of its $17.8B in deferred tax assets.

In energy news overnight a top Libyan Oil Official said that crude oil could reach the $125 handle this week. An Iraqi Minister said overnight that Us-Iran talks on Iraq have been postponed indefinitely. Independent columnist Jermey Warner wrote overnight that oil prices still have the ability to shock. Warner speculates that next week’s quarterly inflation report in the UK is expected to point to a worsening medium-term inflation outlook; the report is seen showing less certainty that inflation will recede later this year. Energy retailers are already warning that unless oil prices ease soon consumers should brace themselves for a 30% to 40% rise in gas and electricity prices next winter on top of the currently inflated levels. The Times wrote overnight that the Iranian petroleum industry needs foreign investment and, despite the country’s vast oil and gas reserves, is struggling to maintain production levels, according to industry experts. According to the article, although Iran is OPEC’s second-largest exporter, production at the country’s leading oil and gasfields is believed to be falling by as much as 10% annually due to a lack of investment and expertise. The article says that supply problems are adding to fears that oil could hit $200/barrel, and cites Goldman Sachs’ energy report from yesterday “The possibility of $150 to $200 per barrel seems increasingly likely over the next six to twenty-four months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty.”

In fixed income news overnight Germany sold €4.09B in 3.50% April 2013 bobl with an average yield of 3.94% and a bid-to-cover of 1.705x. The cover compares to the 1.1x seen at the previous auction. According to source reports overnight the Tesoro Público sets guidance on 5-year dollar bond at swaps -27bps. The Wall Street Journal wrote overnight that the Fed seeks to pay interest on commercial bank reserves in an effort to gain better control over interest rates and more leverage to battle the credit crunch. The article notes that Bernanke will make a written request soon, and adds that people familiar with the matter said key Democratic and Republican lawmakers probably would greet the request favorably, but warned quick passage of the measure isn't guaranteed, given the political sensitivity of any steps that might aid banks. The Wall Street Journal looked at tax changes in the UK's commercial property market overnight, noting that, starting on April 1, the UK government ended its policy of granting long-term tax relief to owners of empty commercial buildings. The move is expected to hurt owners of industrial property the most because the tax increase is sharpest for that sector. S&P said in a report overnight that it expects US sub-prime asset mark-to-market losses and the broader disruption in capital markets to have limited implications for the European insurers.

In currency news overnight Italian Prime Minister Prodi said overnight that the Euro is very strong, adding that he hopes that it does not appreciate any further. The Wall Street Journal wrote overnight that after six years of stumbling against the Euro, the Dollar may be showing signs of getting back on its feet. Since hitting all time lows against the Euro around $1.60 last week the dollar has strengthened; some economists say that even if it creeps down slightly, the dangers of a precipitous fall, at least against the euro, have subsided. The article notes that some economists say any possible stabilizing of the Dollar against the Euro can be sustained only if there is a shift in economic fundamentals toward a recovery in the United States and a slowdown in Europe. Further more the article notes that the Dollar’s recent strength may be an anticipation of such trends, but points out that it is also seen as a response to the Fed’s expected pause in interest rate cuts and to recent statements by financial officials from the major economic powers. Earlier this week the Dar Al-Hayat newspaper wrote an article speculating that perhaps the US seeks to maintain a weak Dollar. The article said that amid this growing weakness of the world's key currency, it appears that the world will not give up dealing with the dollar, no matter how weak it gets. The US administration is well aware of this and of the consequences, doing all that it can to maintain the situation, despite its rhetoric of boosting the dollar. This situation will help the US maintain its dominance and guide the dollar in the fashion that pleases it to make up for its record-high trade deficit, negative saving by American households, and the costs of the war in Iraq, which are estimated at around $5,000 a second, or $3 billion dollars a week. The US is benefiting from its currency, which has become "attractive" to investment and a help for exports, financing the country's war in Iraq and elsewhere. In conclusion the article asks is the US trying to see a weak dollar? What about the countries whose national currencies are pegged to the dollar? In trading the USD maintained a steady tone in Europe, initially helped by hawkish inflationary comments from the Fed’s Hoenig during the Asian session. The EUR/USD fell back below the 1.55 level. The GBP was broadly softer; dealers suspected that deteriorating data in the UK may force a BOE rate cut at tomorrow's MPC meeting. The GBP/USD elected stops below the 1.96 level ahead of the UK production data. The CNY dropped in the 1-year NDF market by its largest amount since October of 2003. Dealers were a bit puzzled that the JPY failed to firm against the majors in the session. The Yomiuiri Shimbun reported that from May 4 that there are 12 trillion yen held by Japanese offshore firms with tax exempt status lurking out there for HIA styled repatriation

Central bank speak was light overnight. Riksbank said in the minutes from their April meeting that the decision to hold rates at 4.25% was unanimous. Commenting in the minutes the MPC said that both the future inflation and growth outlooks are uncertain, adding that there is a risk that the inflation upswing with last longer than previously thought. Furthermore the MPC said that there is a possibility that inflation will remain high even if GDP weakens.

In the UK Nationwide Consumer Confidence for the month of April declined to 70, its lowest level on record. The French trade balance for the month of March declined to its lowest level since records began in January of 1990 at €4.8B as the exports component declined by 6% m/m on the back of a stronger Euro. Both industrial and manufacturing production figures in the UK declined by more than expected during the month of March, but remained within their recent range over the past couple of years. The market seemed to anticipate this as price action for the lower than expected readings began to kick in a few minutes ahead of the release. There was some chatter circulating in the market following the weaker manufacturing and industrial production data, as well as the weaker nationwide consumer confidence, services PMI, and construction PMI, that perhaps the Bank of England will move to cut rates again at tomorrow’s meeting. Adding fuel to the fire is the 5-4 vote posted by the shadow MPC this past weekend, however some analyst point out that back-to-back BOE rate cuts are a rare occurrence. Note that a recent survey of 60 economist showed that only 8.3% of those surveyed predicted a rate cut at tomorrow’s meeting. In the Euro-Zone, March retail sales declined to their lowest level on record at -1.6% y/y, but were balanced out by strong upward revisions to the back month readings, with particular attention paid to the y/y reading, which was revised from -0.2% to 1.0%.

Looking ahead, data kicks off this morning with the release of first-quarter non-farm productivity and unit labor costs, which are expected at 1.5% and 2.6% respectively, and will be followed later on by March pending home sales, which are expected at -1.0%, and March consumer credit, which is expected at $6.0B. In Fed speak the Fed’s Kroszner is scheduled to speak on foreclosures in Cincinnati today, while the Treasury’s Paulson is scheduled to speak on the US economy and Latin America this afternoon. In new supply the Treasury is scheduled to sell $15B in 10-year notes. On the earnings front the following notables are expected to report in the premarket today: Coper Tire & Rubber (NYSE:CTB), DirecTV Group (NYSE:DTV), Devon Energy (NYSE:DVN), Frontier Oil Corp. (NYSE:FTO), Foster Wheeler (FWLT), March & Mclennan (NYSE:MMC), and Transocean (NYSE:RIG).