European Market Update

Daily Forex Fundamentals | Written by Trade The News | Jul 14 08 09:53 GMT |

UK PPI Continues its Ascent
ECONOMIC DATA

UK June PPI Input: M/M 2.1% v 2.6%e || Prior revised form 3.8% to 3.9% |||| Y/Y 30.3% v 29.0% || Prior revised form 27.9% to 28.7%
UK June PPI Output: M/M 0.9% v 1.2%e || Prior revised from 1.6% to 1.9% |||| Y/Y 10.0% v 9.9%e || Prior revised from 8.9% to 9.3%
UK June PPI Output Core: M/M 0.3% v 0.8%e || Prior revised from 1.2% to 1.4% |||| Y/Y 6.4% v 6.5%e || Prior revised from 5.9% to 6.1%

EU May Industrial Production: M/M -1.9% v -2.3%e || Prior revised from 0.9% to 1.0% |||| Y/Y -0.6% v 0.3%e |||| Prior revised from 3.9% to 4.0%e
SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

InBev [INB.BE] and Anheuser-Busch (BUD) formally agreed to merge overnight. InBev will acquire Anheuser for $700/share in a deal valued at $52B. The combined company will be called Anheuser-Busch InBev. The combination will yield cost synergies of at least $1.5 billion annually by 2011 phased in equally over three years. The transaction will be financed with $45 billion in debt, including a $7 billion bridge financing for divestitures of non-core assets from both companies. In addition, InBev has received commitments for up to $9.8 billion in equity bridge financing which will allow the company flexibility in deciding upon the timing and form of equity financing for a period of up to six months after closing. Alliance & Leicester [AL.UK] confirmed overnight that they are in advanced talks on a takeover offer with total value of 317p/share. The company noted that the offer would be 299p/share pus an 18p/share dividend. There is no certainty that offer will be made. The offer represents an 44.5% premium to Friday's closing price NorskHydro [NHY.NO] guided Q2 EBIT at NOK1.6B overnight, well below the NOK2.25B estimate. The company expects a decline in EBIT due to higher aluminum prices and related commodities prices. BAA [FER.SP] commented on successful talks with bondholders, announcing that it plans to exchange $9.6B in bonds for new secured instruments as part of refi plan. Imperial Energy [IEC.UK] confirmed the receipt of an approach overnight, noting that the approach may or may not lead to an offer. The news follows a report in the Times of India noting that India's ONGC was seeking to acquire a stake in the company. Continental [CON.GE] confirmed overnight the receipt of an approach from Schaeffler Group. The Financial Times had reported overnight that company discussed a possible merger. The newspaper article speculated that a possible deal could be worth over €10B.

In the newspapers overnight the Financial Times noted that Endemol's [END.NV] co-founder, John de Mol, refused to rule out a bid for ITV [ITV.UK] The Financial Times wrote overnight that RBS [RBS.UK] does not plan to sell its 5% stake in Bank of China [3988.HK], which is worth $4.7B. According to the Telegraph Wolseley [WOS.UK] may seek to cut hundreds of jobs. The Telegraph reported overnight that the FSA is poised to broker a takeover of Bradford and Bingley [BB.UK] once the company completes it capital raise. According to the Times Scottish & Southern [SSE.UK] is mulling a bid for Ireland's Energia. The Telegraph wrote overnight that SkyePharma [SKP.UK] is in talks regarding a debt for equity swap agreement. The plans reportedly involves around £89M in bonds. The Times wrote overnight that, according to analysts, over $100B of aircraft orders could be cancelled or delayed over the next couple of years due to high fuel prices and the condition of the airline industry. Some analysts believe that 20-30% of the $530B order backlog of Boeing (BA) and Airbus [EAD.FR] could be at risk.

In energy related news overnight the Times reported overnight that that President Bush told the government of Israel that he may be prepared to approve a future military strike on Iranian nuclear facilities if negotiations fail. The report cited a senior pentagon official. Iran's OPEC Governor said overnight that oil shipments from the whole gulf region would be at risk if Iran faces a threat. The OPEC governor reiterated that he sees no need for OPEC to boost production at Sept meeting.

In new supply overnight Italy sold €3.0B in 4.25% 2013 bonds with an average yield of 3.90% and a bid-to-cover of 1.39x, as well as €1.5B in 4.75% 2023 bonds with an average yield of 5.24%, and a bid-to-cover of 1.50x. The Wall Street Journal reported overnight that the Treasury will discuss giving credit lines to Fannie Mae (FNM) and Freddie Mac (FRE). The Treasury may also indicate that it will acquire equity capital in both Government Sponsored Enterprises. The Treasury is also expected to reaffirm that it has no plan to takeover either companies. The Financial Times noted overnight that the SEC is in talks with various US banks regarding plans to aid liquidity in the auction-rate market. The SEC has been in contract with Citigroup (C), Merrill (MER), and Morgan Stanley (MS).

The USD was modestly firmer during the European session aided by the US Treasury's Paulson's weekend commitment to back GSEs. Dealers were also attributing USD strength to M&A related flows after InBev and Bud agreed to merge in a $52B transaction. The EUR/USD is around 1.5860, lower by 45 pips from opening levels in Asia. The JPY was modestly softer after the government lowered its view on business sentiment in its monthly report adding that the Japanese economy was at a standstill with some weakness evident. The EUR/JPY tested all-time highs in Asia for the second straight session. Price action in the cross is shrugging off dealer chatter from Friday of potential intervention being ripe in this pair. The GBP was mixed following June PPI data. The GBP/USD is around 1.9840, off by 15 pips from opening levels in Asia. The EUR/GBP is straddling the 0.80 level throughout the session.

On the speaker front the Bank of England's Barker said in an interview with the Financial Times overnight that the BOE's worst mistake would be losing control of CPI. Barker noted that the BOE must not keep rates high for too long. Barker noted that Q2 retail sales may have some life, and added that a fall in UK house prices 'probably very sharp'.
NOTES

The session was rather quiet overnight, however the press was dead on with merger/offer speculation in Europe overnight. While InBev's acquisition of Anheuser Busch was the only official merger announced overnight many bids were confirmed, while others remain pure speculation. On the data front the PPI input in the US rose to its highest y/y level since records began in January of 1975. Similarly, PPI output was the highest since March of 1982, in line with last month's new high as producers attempt to pass on the effect of rising energy prices. In the Euro-Zone May industrial production declined to its lowest m/m level since December of 1992, while the y/y reading was the lowest since September of 2003. Analysts have attributed the decline to waning demand in the face of perpetuated Euro strength.

Trade The News Staff
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