European Market Update: EFSF might delays its planned 10-year bond issue by a few weeks die to market conditions

Economic Data

- (HU) Hungary Oct PMI: 48.2 v 50.8 prior

- (PD) Poland Oct Manufacturing PMI: 51.7 v 50.2 prior

- (HU) Hungary Sept Producer Prices M/M: 3.3% v 0.7% prior; Y/Y: 4.1% v 3.3%e

- (SP) Spain Oct Manufacturing PMI: 43.9 v 43.7 prior (6th straight month below the 50 level)

- (IT) Italy Oct PMI Manufacturing: 43.3 v 47.2e, (lowest reading since June 2009)

- (FR) France Oct Final PMI Manufacturing: 48.5 v 49.0e

- (GE) German Oct Final PMI Manufacturing: 49.2 v 48.9e

- (GE) German Oct Unemployment Change: +10K v -10Ke; Unemployment Rate:7.0% v 6.9%e

- (EU) Euro Zone Oct Final PMI Manufacturing: 47.1 v 47.3e

- (GR) Greece Oct PMI Manufacturing: 40.5 v 43.2 prior

- (SA) South Africa Oct Naamsa Vehicle Sales:18.9% v 30.0% prior

- (NO) Norway Aug AKU Unemployment Rate: 3.2% v 3.2%e

- (IC) Iceland Central Bank (Sedlabanki) raised its 7-Day Lending Rate by 25bps to 4.75% (not expected)

- (GE) Germany's VDMA: Sept plant and machinery orders Y/Y: +1% v +14% prior

- (UK) Oct PMI Construction:53.9 v 50.0e, five-month high

- (RO) Romania Central Bank cuts interest rates by 25bps to 6.0%, Not expected

Fixed Income

- (EU) ECB allotted $505M in 7-day USD Liquidity Operation at fixed 1.08% vs. $500M prior (8th straight weekly allotment)

- (GE) Germany sold €4.0B in 1.25% Oct 2016 BOBLs; Avg Yield 1.00% v 1.22% prior; Bid-to-cover:1.5x v 1.0x prior

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Notes/Observations:

- EFSF might delays its planned 10-year bond issue by a few weeks die to market conditions

- Speculation that China could be contributing €700B to the EFSF

- Italy cabinet to meet later today to discuss new crises measures

- German Oct unemployment unexpectedly rose

- Major European Final Oct PMI again disappoint to multi-year lows

Equities:

FTSE 100 -0.20% at 5413, DAX +0.30% at 5849, CAC 40 +0.30% at 3078, IBEX 35 -0.90% at 8506, FTSE MIB -0.10% at 14,925, SMI flat at 5587

- European shares rose in early morning but traded down again ahead of Fed's latest policy statement. Investors are hoping that the Fed is planning a QE3 even though a decision is not expected today. Meanwhile, EU officials are convening for emergency talks before the Cannes meeting in the aftermath of Greece's decision to hold a referendum. Most analysts would agree that the failure to approve the referendum will lead to Greece's exit from Europe which in turn will plunge the Greek and European banking system into an abyss. While latest polls show that Greeks want to retain the EU membership, the new austerity measures that come with the bailout package are very unpopular.

- In corporate earnings, MAN [MAN.GE] missed expectations due to faltering European demand. However the stock surged sustained by speculations that Volkswagen may raise its stake which was promptly denied by MAN. The stock, however, continues to trade in positive territory. Standard Chartered [STAN.UK] provided a vague and qualitative update noting that it had achieved a high-single digit revenue growth. Stock trade down over 3%.

Speakers:

- Reports circulated that the EFSF might delay its planned €3B bond issuance for Ireland citing market conditions but could bring ten-year bond issuance over the next two weeks

- Italy Finance Min Tremonti called for financial stability meeting

- Ireland Fin Min Noonan commented that the ECB should cut main refi rate by 50bps by year end and saw such a cut occurring at the Dec meeting. He noted that the ECB was committed to buying Italian bonds until more permanent firewall were in place. He noted that it was hopeful sign that Greek referendum may take place before end of the year

- Bank of Italy is said to intervene in Italian Bonds as it was preparing an emergency operation to swap Italian government bonds held by the nation's banks in exchange for a pledge by the lenders to buy more debt at longer maturities

- China Foreign Ministry stated that it was ready to explore ways to combat EU crisis and hoped that the EU could stick to its bailout plan after Greece planed to hold a referendum. The ministry reiterated that it was always an investor in the European region

- Speculation that China could be contributing €700B to the EFSF (reminder EFSF CEO Regling recently visited the region).On Oct 27th the financial media reported that China might contribute approx €70.5B ($100B) to the EFSF

- German BDB Banking Group commented that there should be no Greek debt relief ahead of referendum but did express confidence the Greek Gov't would win in any referendum. The BDB noted that debt write down for Greece did not make sense before the Greek referendum but that a large majority of banks backed the Greek haircut

- Hungary Central Bank published its Financial Stability Report and noted that banks might reduce lending further following shocks.

Currencies:

- The USD was softer with dealers citing the pending FOMC rate decision rather than developments out of Europe. There was some conjecture that the Fed could indicate more stimulus at today's FOMC announcement.

- The recent spat of risk aversion appeared to take a pause during the session aided by rhetoric from China and continued hope that China would invest in the EFSF. Yesterday's timing of Papandreou's announcement on a referendum could not have been worse as any progress made last week in markets has been wiped out and euro zone leaders face an uphill struggle at the G20 meeting to convince investors that the euro zone was stable. The Italian cabinet to meet later today to discuss new crises measures and the ECB was said to be again buying Italian peripheral bonds.

- The EUR/USD tested the 1.38 level during the session, higher by over 80 pips from its Tokyo open. Overall dealers believed that one should sell the threat of QE3 as actions would not follow any rhetoric at this time. Speculation that the EFSF might delay its pending 10-year bond issue by a few weeks provided some headwinds as the NY morning approached.

- The GBP/USD managed to move back above the one-month hourly uptrend line that was violated yesterday. The pair tested above the 1.6030 level and aide by the better PMI Construction data for the UK

- The USD/JPY continued to hold above the 78.00 level but could not muster any momentum to move far away from the prior ceiling in the pair during the prior two months.

- The G20 leaders conference in Cannes, France takes place on Thursday and Friday. The Greek drama has given them a lot to focus on.

Political/ In the Papers:

- The Telegraph commented on the path of the UK economic recovery. Despite the 0.5% GDP figure, weak manufacturing data weighed in leading to warnings of a double-dip recession. Deutsche Bank UK economist Buckley said the economy is 'worse than the position we were in at the same stage of recovery following the Great Depression'. The recovery is technically the slowest in at least 100 years; it is no bigger than it was in December 2006. Scotia Capital's Clarke said the PMI data suggested a small contraction is likely during the fourth quarter. The risks of a technical recession at the end of this year/start of next seem to have risen. He also warned that the prospects for manufacturing looked even worse as new orders fell at their fastest pace in more than two-and-a-half years.

- There are concerns that the ECB bond purchases may not be enough to slow the rise in Italian yields. The FT reported that Italian 10-year bond yields have continued to hold above 6%, despite the ECB's stepping up of its bond purchases this week. Evolution Securities Gary Jenkins said that the ECB's bond purchases may have reached their 'tipping point'.

- Various analysts commented on recent PMI data. According to Scotia Capital's Alan Clarke, the PMI manufacturing data suggested a small contraction could occur in the fourth quarter. Deutsche Bank UK economist George Buckley said that the risk of a technical recession at the end of 2011 or early 2012 had increased. Ernst & Young ITEM Club economic advisor Nida Ali said the PMI data was a cause for concern. The EEF's senior economist Andrew Johnson said the data showed that the EU debt crisis is starting to have an impact on orders. The focus is now on the UK services PMI data, as it makes up about 76% of the economy.

- Ireland's 2010 gross outstanding debt was revised lower to €144.4B (92.6% of GDP) versus the prior published figure of €148B (94.9% of GDP) following the discovery of a €3.6 billion accounting error. The error is not expected to have any impact on the December budget. The Department of Finance stated the error will not have any impact on the government's budget strategy. The error was a result of a change in the way the Housing Finance Agency (HFA) is funded (the HFA borrowed €3.6 billion directly from the NTMA). When compiling the end-2010 figures, the €3.6 billion was mistakenly treated as external borrowings and was incorrectly added to the gross outstanding debt figure. The 2010 net debt position remains unchanged at €131.8 billion.

Looking Ahead

- 6:30 (GE) German Chancellor Merkel and Turkey PM Erdogan speak at German-Turkish event,

- 6:30 (HU) Hungary Debt Agency (AKK) sells HUF in 3-Month Bills

- 6:30 (PO) Portugal Debt Agency (IGCPto sell €1.0-1.5B indicated range in 3-month Bills

- 7:00 (CZ) Czech Republic to sell CZK5.0B in 5.7% 2024 Bonds

- 7:00 (RU) Russia cancels OFZ Bond Auction

- 7:00 (US) MBA Mortgage Applications w/e Oct 28th:no est v 4.9% prior

-7:30 (US) Oct Challenger Job Cuts Y/Y:No est v 211.5% prior

- 8:15 (US) Oct ADP Employment Change:100Ke v 91K prior

- 9:30 (GE) German Chancellor Merkel,

- 10:00 (IT) Italy Fin Min stability meeting

- 10:30 (US) Weekly DOE Energy Inventories

- 10:45 (UK) BOE to purchase £1.7B in reverse auction for 2022-2036 Gilts

- 11:00 (DE) Denmark Oct Foreign Currency Reserves (DKK): No est v 490.3 prior

- 12:15 (GE) German Fin Min Schaeuble

- 12:30 (US) FOMC Interest Rate Decision: expected to maintain rates at 0.25%

- 13:00 (FR) Germany's Merkel, France's Sarkozy, ECB's Draghi, IMF's Largarde to meet in Cannes

- 13:00 (IT) Italy Oct New Car Registrations Y/Y:No est v -5.7% prior

- 14:00 (IT) Italy Oct Budget Balance: no est v -€11.8B prior; Budget Balance YTD: No est v -€58.8B prior

- 14:15 (US) Fed Chairman Bernanke speaks at Fed Press Conference

- 14:30 (UK) BOE Fisher 16:15 (CA) BOC Carney