European Snapshot: Forex and Equities

FTSE MIB -4.4% at 14,973, FTSE 100 -1.7% at 5470, DAX -2.4% at 5818, CAC 40 -2.6% at 3062, IBEX 35 -2.9% at 8282, SMI -1.3% at 5608

European shares dropped in today's session due to alarmingly high Italian yields. News that Italian PM Berlusconi will resign after failing to obtain the majority in yesterday's vote was welcomed by bourses worldwide. But as the wind of change is felt throughout Europe, investors realize that the next successor of Berlusconi or Papandreou may still not be able to solve the domestic fiscal situation.

Among corporate names, HSBC [HSBA.UK] reported half-year profit figures which missed expectations, hurt by loan impairments. Deutsche Post [DPW.GE] exceeded expectations both on EBIT and Revenue and also raised its outlook. Shares rallied during the session.

Speakers:

Italy PM Berlusconi commented that there was no alternative to early elections and expected vote to occur in early Feb 2012. He noted that centre-right candidate for prime minister would be former Justice Min Angelino Alfano.

LCH.Clearnet confirmed that it would raise margin requirements across the board on Italian bonds effective from close today (Wed, Nov 9th)

Italy President Napalitano stated that an urgent commitment to managing public finances was required to regain confidence and quick decisions were needed with renewed national cohesion

German Economic Council (wisemen) provided an economic update which noted the German economic recovery was slowing and the country might face a "mild" recession if debt crisis was not solved. The council saw considerable risks for Germany economy coupled with a weaker export impulse

German Chancellor Merkel rejected German referendum regarding euro concerns. On the issue of say noted that Italy needed to implement its plan and would likely have to step up its austerity measures

Institute for International Finance's Dallara (IIF) Dallara: Weeks away from completing Greek bond deal but confident can work with new government

Institute for International Finance(IIF) Dallara commented that it was weeks away from completing Greek bond deal but was confident he could work with new Greek government

(SW) Sweden Central Bank (Riksbank) Minutes noted its concern over Euro debt crisis rose since Sept with developments to be weaker for the country in coming period

Germany HDE Retail Group lowered its sales growth outlook for 2011 to 2.0% from prior view of 1.5

Currencies:

The euro zone crisis remained in focus after Italian PM Berlusconi's resignation and the price action suggested that the market lacked confidence in Italy despite PM Berlusconi's resignation. The Italian bond yields surge to bailout trigger level while the Euro slumped against the major pairs.

The Italian two-year govt yield rose above 10-year to form an inverted curve. The Italian 5-year gov't yield surged above the pivotal level of 7.0% with dealers noting that prolong move in the 5-year Gov't bond above the 7% level did precede the bailouts for both Ireland and Greece. The Italian/Germany 10-yr yield spread hits fresh Euro-era record wide above 530bps

The EUR/USD as inching back down towards the lower end of its 300 pip range established in early November but the pair was breaking some minor hourly support below the 1.37 level and appeared to be building some downside momentum. The ECB effect of buying peripheral bonds had little effect in deterring speculation.

The USD/JPY continued to trade the low the pivotal 78 handle but saw little impetus to move in either direction in the session. The JPY crosses appeared to more vulnerable, particularly given the Italian and Greek political situations.

Political/ In the Papers:

According to data provided by Mercer, British worker can expect wage increases to lag behind inflation by more than 2% for at least another year. The data, however, indicated better wage expectations for UK compared to its western counterparts. UK companies expect to offer employee base-pay rises of 3% in 2012 against 2.7% across Western Europe. Note the survey did not measure variables including bonuses, and share options.

The majority of cuts in the Ireland's budget next month are expected to come from the Department of Social Protection, accounting for €700M of the €2.2B reductions in expenditure. The Minister for Social Protection Burton was initially informed to produce cuts of €822M though she argued that due to the increase in the unemployed and because Social Protections outgoings are largely demand-led, a cut of that amount was not feasible. Note the Department of Social Protection is largest spending department with an annual budget of approximately €21 billion.

The Telegraph's Ambrose Evans-Pritchard noted that Asian investors remain reluctant to invest in the EFSF unless the ECB is involved. Bundesbank head Weidmann said that any involvement of the ECB in the leveraging of the EFSF violates the central bank's mandate. There are some concerns that the ECB might have paper losses on its peripheral exposures as the central bank increases its bond purchases. Former IMF chief economist Rogoff believes that the ECB might eventually have to request additional capital from EU governments. With regards to Italy, says the planned resignation of Berlusconi does not mean that Italy will be any easier to govern; the country will continue to face slow economic growth.