OPENING REMARKS at 7AM

EUROPEAN DESK TRADING COLOUR (Cash Only): Overall: -16.9% vs. 20D vol., paired off.
Asset Manager Flow: 67%, 1.26:1 better to SELL. Hedge Fund Flow: 32%, 1.18:1 better to BUY.
Key Sector Flows: Consumer Discretionary: 15.1% (+4% vs. 20D average), 1.95:1 better to SELL. Materials: 14.1% (+5.5% vs. 20D average), paired off. Financials: 12.45% (-7.2% vs. 20D average), 1.36:1 better to sell. Industrials: 11.7% (+1.6% vs. 20D average), 1.34:1 better to BUY. Energy: 7.9% (-1.9% vs. 20D average), 1.21:1 better to BUY.
Key Stock Flows: VIV 6.9%, 20.3:1 better to SELL. VED: 3.07%, all to SELL. TOTAL: 2.6%, 1.37:1 better to BUY RYA: 1.85%, 1.45:1 better to BUY. ENI: 1.77% 1.18:1 better to SELL
How MS ranked: VIV: 1st, traded 6.7m. VED: 1st, traded 1.35m. TOTAL: 1st, traded 905k. RYA: 2nd, traded 7.2m. ENI: 1st, traded 1.34m.

ASIA SO FAR: (J Grafton) A-Shares unch, Kospi -10bps, MXASJ -20bps, Nifty -20bps, STI -25bps, Taiwan -25bps, ASX -30bps, NKY -40bps, HSI -45bps, H-Shares -55bps. Asia not convinced by the overnight breakout with all indices fading fast after opening on the highs. Meredith reiterates her concern about the capitalisation of US banks and without their sponsorship an acceleration to the upside faces headwinds. Taiwan and China signed the long awaited MoU but the local market did not follow the 4% premium priced into the ETF and MSCI Taiwan futures overnight. The agreement lacked detail and could take months to implement. Perhaps reality is sinking in that this agreement is more of a silent Chinese invasion, highlighted by BOC and ICBC both issuing statements of their desire to open branch networks in Taiwan. AUD gets knocked following a more dovish statement from the RBA saying the pace of interest rate increases is an 'open question'. Crude and Gold lower on Globex as DXY claws back to 75. Shanghai Copper futures are strong following the 5% rally on the LME. We have seen strong demand for all the Chinese metals not least in Maanshan Iron & Steel following out upgrade today. Flow continues to improve - 25% heavier than the 20-DMA and we have been 2.6x BTB. Financials (28%) 1.2x BTB, Materials (21%) 5.5x BTB and Consumers (18%) 1.6x BTB.

US RECAP: S&P 500: 1109.30, +1.45% DJIA: 10406.96, +1.33% NASDAQ: 2197.85, +1.38% Equities ended sharply up at new 2009 highs on dovish Bernanke comments despite poor data prints. USTs saw longer end gains, continuing to ignore the rally in risk assets. 2ys yield fell 5 bps to 0.77%, 10ys 10 bps to 3.33%, 30y 10 bps to 4.26%.. Dow futures are slightly negative, oil prices trading below 79$/bbl, gold near 1137 $/oz. NY DESK TRADING COLOR: US Cash Flow: 1.2:1 to BUY, MF: 60% Paired Off HF: 40% 1.7:1 Better to Buy. Volumes down about 10% vs. the YTD avg. Below avg: * requests for capital, * crossing ratios & * 7 fig+ orders on the desk. % of shares traded short on the desk was 2.8% near record lows. Lack of the conviction in the market: With about 46% of the HF’s out there still under their high-water mark and only 5-6 weeks left to play in the game it felt like forced buying. ETF’ Volumes 2.5x the 20 day moving avg. (been busy the last 2 weeks here too) All HF’ buying 2 to 1 better to buy. Particular focus on EM ETF’s.

EURO RECAP: (M Briggs) ESTOXX +1.5% FTSE +1.63% DAX +2.07% CAC +1.5% This week kicked off with a relatively benign morning despite a strong Asian session (on Chinese officials quashing speculation regarding Yuan devaluation and speculation China/Taiwan MoU has been signed) resulting in the 1100 level being broken and Europe opening up around 80bps. The break in the S&P futures was similar to that of Wednesday last week - the level was broken but markets failed to push on, trading in a tight (30bp) range until lunchtime. The mining names lead the markets following a positive broker note but they will also have benefitted from investors seeking high beta names. The retail space struggled due to disappointing numbers from H&M (-3.6%) as well as Pou Sheng (biggest Adidas and Nike distributor in China) announcing a profit warning. US macro data looked a bit disappointing (Advance Retail Sales 1.4% v 0.9% cons but with a worse revision and disappointing less autos number, Empire Manufacturing 23.51 v 30 cons), and caused a small sell off, before the US market rallied from the open through to the European close. The US futures desk saw index buying along with short covering, however in London we saw little notable activity.

CREDIT RECAP: (E Pénot) Main 82-83.5 (-2), Xover 510-511 (-7), HIVOL 135-136 (-2). Credit indices were tighter on the day but failed to rally as much as equities as it seems there are some decent longs out here. The underperformer is Sovex which took another leg wider (+ 3.75bps) with 3 potential explanations for this move: (i) fear of next year's supply, (ii) profit taking in peripherals and (iii) potential ECB tender limits on Government stocks. In cash, it was a busy day with good volumes going through and generally better buyers of bonds with recent new issues driving the market tighter. In terms of news flow, we are seeing more headlines from companies that are engaging aggressive activities reminiscent of an outright bull market. Take for example Vivendi that is paying a hefty price for GVT, Ahold announcing that it is ready to use cash to make acquisitions or last week Liberty Global buying Unity Media and leveraging the company up. All this can be negative for credit and we like monitoring companies such as Morrison's that offer cheap optionality for a takeover story and subsequent widening in spreads.

US TREASURIES: (T Wieseman) Treasuries posted strong longer-end-led gains Monday, as a broader continuation of the post-refunding rebound that started Thursday afternoon was added to by weaker than expected economic data and dovish remarks from Fed Chairman Bernanke. On the day, benchmark Treasury yields fell 5 to 10 bp led by the 7-year, though the strongest area of the market was off-the-run bonds. The 2-year yield fell 5 bp to 0.77%, 3-year 6 bp to 1.29%, 5-year 8 bp to 2.18%, 7-year 10 bp to 2.86%, 10-year 10 bp to 3.33%, and 30-year 10 bp to 4.26%. TIPS managed to keep pace with the strong nominal gains as real yields continued plunging to their lows since spring 2008. This further strength came as the dollar index sank to another new low for the year, taking out the prior lows hit in mid-October, and commodity prices continued moving higher, with broadly based gains led by industrial metals, with the LME composite index up 5%. The 5-year TIPS yield fell 9 bp to 0.36%, 10-year 9 bp to 1.17%, and 20-year 11 bp to 1.83%. After last week’s big outperformance versus much more muted Treasury upside, mortgages paused, posting only small upside that lagged Treasuries significantly and a big narrowing in swap spreads more so.

BERNANKE (D Greenlaw) Bernanke’s discussion of the economic outlook was right in line with expectations – a sustainable recovery has unfolded but there are some important headwinds and thus the pace of growth is likely to be subpar. As a result, inflation pressures should remain muted. He reiterated the “extended period” language from the FOMC statement, but qualified that message by including a bit of a caveat, as follows: “significant changes in economic conditions or the economic outlook would change the outlook for policy.” So, while the Fed Chief does not see any need for removal of policy accommodation over the near term, he is hinting that the Fed needs some flexibility so that they can be responsive to the incoming data. It’s somewhat unusual for a Fed Chairman to discuss dollar policy – this is normally considered to be the purview of the Treasury Department. Some might argue that Bernanke is merely indicating that policy will respond to conditions that might be influenced by changes in the value of the dollar. But, Bernanke is also trying to make the case that Fed policy is consistent with a strong dollar. However, this sort of message rings hollow when it is followed by a reference to the FOMC statement language that conditions are likely to warrant an exceptionally low federal funds rate for an extended period. We’re a bit concerned that Fed jawboning on the dollar risks the same sort of loss of credibility that has plagued Treasury Secretaries who blindly repeat a strong dollar mantra regardless of the market and policy environment. The most interesting exchange during the Q&A session came when Henry Kaufman asked about the link between monetary policy and asset bubbles. Bernanke noted that it is difficult to know if the price of an asset is in line with its fundamental value but that it is not obvious there are any significant misalignments at present. Moreover, Bernanke argued that a supervisory approach to regulatory authority should be used to restrain undue risk taking -- not changes in the fed funds target.

MSBCI: (D Cho / D Berner) Morgan Stanley Business Conditions Index (MSBCI) maintained its strong run well into expansion mode in early November. The headline index repeated last month's positive showing - coming in at 79% and posting its 4th consecutive reading over the critical 50% threshold. The credit conditions, business conditions expectations and advance bookings indices all yielded strong results in November. Moreover, after struggling to break out of contractionary territory for over a year, the price index reached the 50% plateau this month. Finally, the capital expenditures plans series jumped dramatically by 14 percentage points to 25% in the November MSBCI - the highest level for this indicator since October 2008.nearly three-quarters of all respondents reported that the quality of their earnings estimates had either improved or remained the same in the past year. After nearly doubling to 17% in the October MSBCI, the hiring series relinquished last month's gains and declined four percentage points to a paltry 13% in November. Furthermore, the hiring plans series was almost flat, only increasing one percentage point to 18%. Surprisingly, only 11% of analysts definitively reported that uncertainty over healthcare reform was making their companies reluctant to hire.

MACRO CALENDAR: UK Inflation (Oct) @ 09:30, CPI ~ MSe 1.4%Q / Cons 1.4%Q / Last 1.1%Q: We expect a rise in year-on-year inflation on both the CPI and RPI measures in October (to 1.4% from 1.1% in the case of CPI and to -1.3% from -1.4% in the case of RPI) courtesy of energy-related base effects. The further easing in food price inflation should provide some offset. There are some upside risks to our estimates in the near term on further lagged feed-through from weaker sterling, and RPI could again get additional support from second-hand car prices. Risks are not all to the upside, however. Food prices have been below our expectations recently and the weakness in the underlying economy may continue to push down some prices (services inflation is about 2ppt lower than this time last year). Inflation is likely to rise sharply in December and January, as last year’s VAT rate cut is reversed. EMU Trade Balance (Sep) @ 10:00 ~ MSe €3.5bn / Last €1bn: Despite the strength of the euro, exports should have picked up considerably in September, courtesy of a solid performance in Germany. We expect a gain to the tune of 2.5%M – quite a change from the large fall in August. However, currency movements affect exports with some lags. The chances are that the euro will start exerting detrimental effects some time next year. Of course, the currency is not the only factor that matters. The hope is that, by then, the expected acceleration in foreign demand will alleviate some of the pain. But while some key markets have now started to expand at a brisk pace, i.e. Asia, demand in both the UK and US, the two major destinations for euro area exports, remains subdued. US Producer Price Index (Oct) @ 13.30 ~ MSe 0.2%Q / Cons 0.5%Q / Last -0.6%Q, CORE ~ MSe -0.1%Q / Cons 0.1%Q / Last -0.1%Q: An unusually sharp rise in food prices – driven mainly by higher quotes for dairy items, soft drinks, fruits and vegetables – is expected to help push up the headline PPI this month. The energy category is likely to register only a slight uptick following on the heels of some big up and down swings in prior months. The main wildcard this month is motor vehicles. The PPI always switches over to new model year pricing in October, which often leads to some big swings. Indeed, there is considerably more variability in the core PPI readings for October than for any other month of the year. We suspect that price increases for 2010 models will be somewhat less than in recent years, so we look for a decline in car and truck prices. But, there is a considerable amount of uncertainty surrounding these estimates. Thus, the main focus in this report should probably be on the core ex motor vehicles, where we look for a rise of 0.1% -- right in line with the recent trend. Industrial Production Capacity Utilization (Oct) @ 14.15 ~ MSe 0.0%Q / Cons 0.4%Q / Last 0.7%Q: The employment report – together with figures on vehicle assembly schedules and electricity output -- points to little change in industrial production during October. Industries such as autos, printing, furniture and nonmetallic minerals are expected to post significant declines, with offsetting gains evident in petroleum, food & beverage, apparel, chemicals and utilities. The key manufacturing component is expected to be -0.1%, while manufacturing ex motor vehicles is projected to be unchanged.

DXY NEW 52 WEEK LOW:

UST 10 YEAR YIELD: COMES INTO IT’S LOW END OF THE MONTH LONG TRADING RANGE