European market Update: UK inflation falls at its fastest rate in 11 years; Equities heavy on expectations that TARP unlikely to be tapped again until Obama takes over Presidency

*** ECONOMIC DATA ***

- (SZ) Swiss Sept Retail Sales Y/Y: 6. 4% v 0.8%e

- (CZ) Czech Sept Retail Sales Y/Y: 5.9% v 4.0%e

- (HK) Hong Kong Oct Unemployment Rate: 3.5% v 3.6%e

- (SW) Swedish Q3 Total Number of Employees; 1.5% v 2.0% prior

- (IT) Italian Sept Total Trade Balance: -€2.59B v -€2.5Be; Trade Balance EU: €690M v €250Me

- (UK) Oct CPI M/M: -0.2% v 0.1%e; Y/Y: 4.5% v 4.8%; Core CPI Y/Y: 1.9% v 2.2% (Largest drop in at least 11 years)

- (UK) Oct Retail Price Index M/M: 217.7 v 218.6e

- (UK) Oct RPI M/M: -0.3% v 0.0%e; Y/Y: 4.2% v 4.5%e; RPI ex Mortgage Payments Y/Y: 4.7% v 5.2%e

- (IT) Italian Sept Current Account: -€4.89B v -€3.5B

- (RU) Russia Oct Industrial production M/M: 2.8% v 1.4% prior; Y/Y: 1.6 v 3.8%e

- (BR) Brazil Sept Retail Sales M/M: 1.2% v 1.1% prior; Y/Y: 9.4% v 8. 8%e

*** SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM ***

- Equities: Rio Tinto [RIO.UK] confirmed the receipt of EU statement of objections on BHP offer [BLT.UK] || Carrefour [CA.FR] Board of Directors confirmed Lars Olofsson as the new CEO, effective Jan 1|| British Energy [BGY.UK] Reported H1 Net £23M (includes items) compared to estimate of £88. 0M. Revenues of £1.28B were slightly above estimate of £1.25B. || Baloise [BALN.SZ] Reported 9-months Business volume of CHF6.45B versus year ago level of CHF6.28B. It noted that it would complete its share buyback program at end of Q2. It expected to achieve positive results in H2 of FY08. || UCB [UCB.BE] Cimzia studies showed significant clinical benefits for Mono; fast 4Ward study met primary and secondary endpoints. Cimizia combined with methorexate cut arthritis signs. || Thales [HO.FR] Alcaltel- Lucent [ALU.FR] is in talks with Dassault Aviation [AM.FR] over possible sales ofd its 20.8% stake in Thales. Dassault offering €38/share|| Lonmin [LMI.UK] Reported FY Revenues $2.23Bin line with estimates of $2.25Be. FY09 Rev remained in line with guidance. Guided 2009 platinum sales target similar to 2008 levels and targeted $250M Capital Spending in FY09.|| Enterprise Inns [ETI.UK] Reported FY08 Net £189M in line with consensus of £191.8Me. However its revenues were £880m below the £891.4M estimates. The company noted that its trading environment remained tough and planned to offer rent concessions || Carphone Warehouse [CPW.UK] Reported H1 Best Buy Europe Revenues of £1.6B, up 12% y/y. Its Like-for-like sales were up 5. 1% y/y; May demerge telecoms arm. On the conference call, the CEO noted that any demerger decision would be a 12 month process, there will be no delay in opening of European Best buy stores || Rexam PLC [REX.UK] Provided an interim management update. The company saw results inline with expectations adding that its outlook for 2008 remained unchanged. Four months to end Oct were in line with expectations but it saw softness in Russian market. Overall its beverage can performance was solid || Severstal [CHMF.RU] Reported Q3 Net $3.24B above estimates of $1.10B.. Its revenues were $18.15B compared to estimates of $14.20B.. It suspended its share buyback program citing market conditions || Burberry [BRBY.UK] Reported H1 Rev $539.1M in line with consensus of £539.0M. The company noted that trading had become more difficult in H2, particularly in US. Lastly the company announced Middle East JV with Jashanmal. || Barratt Development [BDEV.UK] Provides interim management report:. Markets remain challenging; 19-week visitor levels down 5.8% y/y || Easyjet [EZJ.UK] ReportedFY Net £83. 2M versus £82.5M estimates, Rev £2.36B v £3.31Be, outlook remains uncertain. || Volvo [VOLVB.SW] Reported Oct Group Truck deliveries at 22.1K, which were down12% y/y. it added that it experienced substantial cancellations || Premier Foods [PFD.UK] Provides interim management report: It noted that its interim dividend would no longer be paid. In talks with banks which would continue into Q1 2009 and its next covenant test deferred until March 31st. It noted that Market conditions were not conducive for asset sales, but added it received approaches for parts of portfolio from 'at least' 20 companies

- No pressures from bank or holders on disposals || || Galapagos [GLPG.BE] Entered into new collaboration agreement with Merck Serono [MRK.GE] valued at €1.1M

- Speakers: World Bank lowered it view on Russian 2008 GDP growth estimate to 6% from 6.8% and placed 2008 inflation outlook at 13.5%. the World Bank also reduced its 2009 GDP estimate to 3% from 6.5% prior view. Lastly it noted that fundamentals guide more Rouble weakening in the short term ||German Gov't Adviser Ruerup stated that the German economy might contract in 2009. he added that the recent oil price drop would allow the ECB to lower interest rates, thus hopes that ECB has begun an easing cycle on rates. Lastly, the financial market crisis might not last " too long" || ECB's Tumpel-Gugerell stated that there was a strong possibility of a slowdown in economic growth ||Singapore Fin Min stated that they are closely following impact of financial crisis on Singapore banks. The ministry noted that the market is not frozen amid financial crisis and that bank lending to non bank customers continued to rise. The minister admitted that some bank tightening was "inevitable" although not serious. || Indonesia Central Bank Governor stated that it would not let the IDR currency hit an irrational level. He added that the fall in Rupiah was partly due to corporate FX demand and imports. || Taiwan Central Bank stated that it aims to maintain order in FX market || South Korea Fin Min Kang: South Korea, China and Japan to discuss details of FX swap

- In Currencies: Trading has been very quiet today in Europe with most currencies remaining range-bound for the session. Overall the theme continues to be defined by purchasing USD in reaction to weak equities (and visa-versa). EUR/USD was moving towards the 1.26 handle as dealer chatter circulated that a Chinese equity house was 'in trouble' and long Euros. Rumor centered on Hua Xia securities which is the third largest in China. Dealer noting that selling of EUR/USD pair toward 1.26 was accompanied by good number Chinese-related names (non-central banks). The early price action in Europe was again dominated by the EUR/GBP cross as continued profit-taking resumed after the pair hit fresh all-time highs last week. However, the softer UK inflation data reversed the GBP's upward momentum. The fall in Fuel Prices was cited as the main cause of slowing annual UK CPI rate. The carry-related currencies did exhibit some minor risk aversion characteristics. EUR/JPY was off 50+ pips at 121.33 while GBP/JPY was lower by 20 pips at 144.40. EUR/CHF at 1.5120, down 40 pips since the Asian open. || Philippine Central Bank stated that it would discuss the potential of an interest rate cut at its policy meeting this Thursday.

- Fixed Income:



- Energy: OPEC Sec Gen El-Badri noted that perhaps it is too early to talk about cutting oil supply ||Russia Energy Min: Russia will resume talks with China over $25B loan || Citigroup analyst noted that Gulf States faced deficits with oil below $50/barrel with Dubai Is Most Vulnerable || Front month NYMEX crude hits lowest level since Jan 2007 at $54.13 during the European morning

- Credit Crisis: Spanish Sept bank-loans arrears climb to €48.7B, rise to 2.6% of total bank loans v 2.5% prior || HM Treasury comments on re-capitalization scheme, says focus is on maintaining financial stability

and would ensure that taxpayers and depositors are protected. There would be no automatic right of banks to access scheme and, firms must have sustainable business model, responsible management and be seeking appropriate levels of capitalization || iTraxx crossover index seen at 873 bps, + 13 bps; iTraxx Europe index 160bps, + 4bps

***Notes***

The UK inflation fell dramatically in Oct aided by lower energy prices. The recent intensification of the credit squeeze was likely to add further downward pressure and the BoE is likely to deliver further aggressive rate cuts to prevent inflation from keeping below the 2% target for an extended period medium-term.

- Equity markets in Europe were again on the heavy side as the topic of TARP again reigned supreme. US Tsy Sec Paulson noted yesterday that it was unlikely to tap rest of TARP before Obama takes over the US Presidency. Thus equity markets seem nervous on the notion that what was going to be spent has already been spent to stabilize the financial markets. The rest of the funds would be held for emergencies. The question overshadowing the dealing desks is whether the 'panic period' of the crisis has now passed and now wait for the trickle-down effect of the solutions to take hold. Overall maintaining a trading range in equities, commodities and currencies through year-end would signal a small victory for the central banks.

- One dealer noted that going forward will prove to be a difficult task to judge the effectiveness of monetary and fiscal stimulus since near term judgment would be clouded by the backdrop of recessions and rising unemployment coupled with 'improving' monthly economic numbers when compared to prior months “horror shows. Another dealer pointing out that The lackluster outcome of the G20 meeting last Friday has fueled fears of an “L-shaped” recovery rather than a “V” or a “U”.

-Looking Forward:

- 8:30 (US) Oct Producer Price Index. M/M consensus expectations are -1.9%; The prior number was -0.4%. Y/Y consensus expectations are 6.2%; The prior number was 8.7%

- 8:30 (US) Oct PPI Ex Food & Energy. M/M consensus expectations are 0.1%; The prior number was 4.0%. Y/Y consensus expectations are 4.0%; the prior number was 4. 05

- 9:00 (US) Sept Net Long-term TIC Flows. Consensus expectations are $27.2B; The prior number was $14.0B. Total Net TIC flows. There are no consensus expectations for this number; The prior number was - $400M

13:00 (US) Nov NAHB Housing Market Index. Consensus expectations are 14; The prior number was 14.

- Speakers

- 9:30 (US) Treasury Sec Paulson, Fed Chairman bernanake to speak at House of Representatives hearing on TARP

- 9:30 (EU) German Chancellor Merkel, Italian Pm Berluscopni and Italian Finance Minister Termonti expected to hold press conference

- 10:00 (GE) ECB's Stark to speak in Frankfurt

- 10:45 (UK) BoE's Besley to speak in London

- 13:30 (EU) ECB's Trichet to speak in London