European Market Update

(GE) Germany Sept Import Price index M/M: 0.6% v 0.6%e; Y/Y: 6.9% v 6.9%e

(FR) France Oct Overall Demand Business Survey: 2 v 16 prior

(SW) Sweden Sept Trade Balance (SEK): 11.9B v 7.5Be

(IT) Italy Oct Business Confidence: 94.0 v 94.0e

Fixed Income

(EU) ECB allotted $500.0B in 7-day USD liquidity operation vs. $500M prior at fixed 1.07% (7th straight weekly allotment)

(IT) Italy Debt Agency (Tesoro) sold €8.5B vs. €8.5B indicated in 6-month Bills; Avg Yield 3.535% v 3.071% prior (highest yield since Sept 2008); Bid-to-cover:1.57 x v 1.74x prior

(EU) ECB allotted €44.6B vs. €65Be in 3-Month Tender at fixed 1.50%

(EU) ECB allotted €56.9B vs. 50Be in 12-Month Refinancing Tender at fixed 1.50% (prior was €60B)

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Notes/Observations:

Australia's Q3 inflation data sparks rate cut hopes

Pressure rises for Italy PM Berlusconi to deliver credible budget cut plans

China Premier Wen hints at macroeconomic policy that would be more accommodative to stabilize economic growth

Equities:

FTSE 100 +0.10% at 5529, DAX flat at 6045, CAC 40 flat at 3174, IBEX 35 -0.30% at 8855, FTSE MIB +0.20% at 16,094, SMI -0.40% at 5688

European shares traded mixed throughout the session. The strong corporate earnings were offset by concerns that the key summit on Wednesday will be a disappointment. Markets are starting to price in the deterioration of expectations that leaders will finalize a strong solution which would tackle the debt crisis in the Eurozone. Key disagreements remain among EU officials and include ways on how to enhance EFSF's power and haircut size.

In corporate news, Heineken [HEIA.NV] rose over 1% after exceeding revenue expectations as decline in Western Europe sales were less than expected. Company reaffirmed guidance. Pharmaceutical name, Merck [MRK.GE] also reported better than expected earnings which pushed the stock higher by over 4%. Swedish bank Svenska Handelsbanken [SHBA.SW] exceeded expectations on net income but came in weaker in net interest income. Stock rose as loans losses dropped over the year. Meanwhile, French carmaker Peugot [UG.FR] declined after reporting declining automotive revenues due to pricing pressures which would lead to job cuts of 5000.

Speakers:

China Foreign Ministry commented that the CNY currency level was now close to equilibrium and that asking for CNY currency to appreciate in a short-time frame would harm the global economy. China also noted that it would keep an open mind on co-operation with Europe

EFSF CEO Regling to visit China on Friday, Oct 28th

EFSF spokesperson commented that it could not confirm that China would participate in EFSF's special purpose vehicle (SPV)

Czech Finance Ministry debt chief Pavelek commented that volatility in the market might delay eurobond sale and such a sale was not required for 2011. The Debt Agency stated that it sold around CZK 20.4B in retail bonds and such issuance would help to prefund for 2012

Turkey Central Bank Gov Basc commented that it would begin a period of monetary tightening as inflation was expected to rise significantly due to depreciation of TRY currency. It might raise the amount of TRY reserves in Fx to 40% and permit higher bank rates and lower FX reserves. The central bank might intervene in FX markets if TRY currency price is 'unhealthy' and that the central bank's gold holdings would increase

Greek debt plan might include exchanging existing Greek government bonds for a mix of cash and bonds and that every €100 worth of Greek debt would be swapped for €15 of cash and €35 of a new 30-year Greek bond paying a 6% coupon. The plan would have Greece's debt to private creditors fall from €205B to €102.5B

EU said have not yet to receive letter that details the Italy's reform but is expected ahead of today's EU Leader Summit

Norway PM Stoltenberg: Norway will not contribute to the EU aid package

Estonia Central Bank: Global financial environment had recently worsened. The euro zone crisis had spread and was previously confined to a few EMU States. It noted that it was harder for banks to get financing in bond markets and that the health of Nordic banks was key for Estonia's economy

Currencies/Fixed Income:

The FX markets were relatively quiet ahead of the 'decisive' EU Leader Summit that will begin after the European markets close today. The EUR/USD maintained a stead, positive tone above the 1.3930 level despite the preparation for disappointment from the results of today's summit. Key expectations widely known at this point suggest a Greek haircut of around 50%; Bank recapitalization plan between €90-100B and some form of leveraging EFSF for sovereign bond purchases.

The USD/JPY continues to hover just above fresh all-time lows of 75.70 that was set on Tuesday. Thus BoJ intervention risk has increased as rhetoric picked up significantly. Japan Fin Min Azumi informed G20 that Japan saw USD/JPY level between ¥76-77 as inappropriate

With no recent statement from the SNB, the EUR/CHF continued top drift lower towards the alleged floor of 1.2000.

Political/ In the Papers:

The Telegraph's Evans-Pritchard commented that political battles are complicating efforts to complete the EU rescue plan. With regards to Greece, the country's finance minister said the EU's latest proposals could require a "super-majority" in parliament, amid opposition from Greece's non-ruling parties. RBS said that the Italian government could "implode" before its mandate ends, which can worsen in the EU crisis. In terms leveraging the EFSF, some analysts have concerns that such a plan would be ineffective, unless the ECB is involved.

The Irish Times reported that the Irish Bank Resolution Corp (IBRC), formerly known as Anglo Irish Bank, will repay bondholders $1 billion in senior unguaranteed bondholders next week. Also in other press sources, it was reported that Irish Nationwide's access to ECB liquidity had been further reduced as it increases its dependence on Irish Central Bank sources. Irish Nationwide is now part of Anglo Irish Bank; it has securitized a pool of Irish mortgages which were eligible collateral for liquidity from the ECB. Currently, the ECB requires a second credit rating for any collateral it takes, placing Irish Nationwide reliant on the Central Bank.