NEWS / Foreign Exchange

European Market Update

Eurozone March manufacturing PMI down slightly, but growth holding up: (EU MARCH MANUFACTURING PMI: 55.4 V 55.7 expected; PRIOR 55.6) The new orders component came in at a 14mnth low, and there was a slight acceleration in the input price component. Considering the financial market volatility since the last PMI reading, the data sponsor said that the PMI reading comes with a reassuring message of rising uncertainty and is not supporting the idea that the world economy is slowing abruptly.

- UK manufacturing PMI slows in February, but rate hike expectations provide support to GBP: (UK MARCH MANUFACTURING PMI: 54.4 V 55.1 expected; PRIOR 55.4) The input price index came in at the highest level since November, with export orders climbing at the fastest pace since January 2004. There was some good inflation news for the MPC, with the output price component easing from a record high. Some analysts expect a surprise rate hike from the BoE after the shadow committee voted 8-1 in favor of a rate increase this week.

- Trichet says that ECB has intentionally changed its terminology for describing interest rates: Trichet said in a press interview that the ECB currently describes rates as "moderate" and monetary policy "continues to be on the accommodative side" compared with "low" and "accommodative" previously. Trichet continued his hawkish rhetoric, saying that price stability risks are tilted to the upside in the medium term. Trichet reiterated that the ECB will do what is needed to ensure price stability.

- Swiss National Bank's Hildebrand warns about risk appetite: Hildebrand said that the SNB policy is probably still "expansive", adding that the SNB is moving in a direction where policy may not be expansive anymore. Hildebrand warned that market volatility may return. (Risk aversion continues to fall during today's trading, with the index compiled by UBS falling to -0.17 from +0.28 last Thursday)

- M&A expectations boost European equities: European shares ignored the sharp losses in Japan (Nikkei closed down 1.5%) and traded slightly higher, as telephone companies and carmakers rallied on M&A chatter. DaimlerChrysler climbed after press reports that the Chrysler unit may be sold for more than expected. Telecom Italia traded higher after AT&T and America Movil SAB each offered to buy a stake in the holding company that controls the Italian phone company. In Switzerland, Novartis was down 3.3% after it pulled its Zelnorm bowel drug from U.S. shelves and cut its 2007 sales forecast.

- Forex: The USD stabilized ahead of the ISM data. Recent news like last week's durable orders data has boosted bearish sentiment towards the U.S. manufacturing sector, but Friday's Chicago PMI (not always the best of indicators), was a much stronger than expected 61.7. The JPY weakened after the Tankan survey showed Japanese corporate sentiment worsened for the first time in a year amid growing concerns about the outlook for the U.S. economy.

- Commodities: Despite the UK-Iran tension, spot gold is lacking upside momentum, holding steady around $664 for the entire session. There's not enough follow-through buying to make gold break higher, with near-term support is seen at $660/oz. Profit taking led copper prices lower.