US stocks advanced Friday, giving the market its third straight weekly rally, as higher-than-estimated corporate earnings overshadowed the Chinese central bank’s attempts to control inflation. Caterpillar climbed 2.4 percent after reported machinery sales rose 49 percent in three months and Intuit rose 7.3 percent as the maker of tax software forecast profit that topped estimates. Elsewhere CF Industries Holdings shed 6.7 percent, leading declines among fertilizer stocks, as wheat fell amid bets Chinese demand will wane. And Apple fell 2.2 percent as the US examines whether its media subscription services violates antitrust laws.

Today’s Market Moving Stories

Germany's Merkel saw her CDU party more than halve their vote in Hamburg regional elections. The CDU will lose three seats in the upper house of the federal parliament. The risk is that Merkel moves towards political populism (hurting the Euro), ahead of further regional elections this year. This really was a drubbing with the CDU vote falling from 43 percent to 21 percent while the opposition Social Democrats racked up nearly 50 percent from 34 percent. Polls even a week go had put the CDU ahead (36 percent to 22 percent) so this appears to be a surprise and was the worst ever performance of the CDU in the city. A major point of discontent is the CDU’s dealing of the euro crisis so concessions for peripherals countries in forthcoming EFSF re-jigging are likely to be even more reluctantly made going forward.

This is the start of a tough election year for Merkel, as she has 7 State votes to endure... And it started very badly. With clear rifts shown in the wrangling over Weber's departure and now further weakening of her party at the poll booths... She will be in an heightened state of alert to try and find popularity ahead of the remaining polls. This, in my opinion (and I hear in some of the German Press), should force her towards more hard line Anti-European policies... Especially when it comes to decisions that put the German taxpayer on the hook for more bailout cash. It may only be the case of hardline rhetoric, with eventual compromise... But it should at least make the negotiations leading up to the March 25th EU Leaders Summit, more heated.

IMM positioning data
Dramatic shifts in sentiment last week.  Key takeaways:

Speculative GBP longs almost doubled, taking positioning to levels not seen since Nov 2007. Was one of the biggest one-week shifts in sterling sentiment ever recorded. Rising rate hike expectations clearly behind the move. Note though that the positioning snapshot was taken on Tuesday, the day before Governor  King's relatively dovish performance at the inflation report press conference. Longs may have been trimmed in the ensuing disappointment, but are likely to be added to once more as the market looks ahead to BoE minutes on Wednesday.

Yen positioning turned short for the first time in 8 months - the biggest one-week swing in yen sentiment since Feb. 2004 (if there are clients out there looking to get long USDJPY and are just waiting for the right moment - this is probably as good a time as any. Many are waiting for a signal to get long, and for many, this is the signal they've been waiting for. Sure we have year-end repatriation flows to contend with for the next 6 weeks or so. But a yen-negative collapse of the Japanese govt it's looking increasing likely over the same timeframe.

Middle East / North African Developments

Libya: Saif al-Islam Gaddafi (one of leader Muammar Gaddafi’s sons) says that his father will fight protests against his rule until the "last man standing." He says that the army will enforce security in the country at any price and that it stands behind his father as "leader of the battle in Tripoli". He warns: "We will take up arms... we will fight to the last bullet. We will destroy seditious elements.”  He blames Arab and African expatriates of encouraging unrest in the country and argues that the violence is aimed at installing Islamist rule. He also warns: "If everybody is armed, it is civil war, we will kill each other."

Al Jazeera quotes the head of the Al-Zuwayya tribe in eastern Libya as threatening to cut off oil exports unless authorities stop what he called the "oppression of protesters" (Libya produces around  1.55 mn barrels per day or 1.8 percent of global production). Latest : The BBC is reporting that Qaddafi has left the capitol Tripoli this morning

Morocco: A crowd of up to 10,000 people march through Rabat on Saturday.

Iran: Riot police disperse protesters commemorating the death of two pro-democracy demonstrators killed during anti-government protests last week.

Algeria: Police break up a rally by thousands of pro-democracy supporters to keep them from marching.

Yemen: Shots are fired at a demonstration in the capital Sana'a. Thousands of people also stage sit-ins in the cities of Ibb and Taiz, demanding the departure of President Ali Abdullah Saleh.

It is worth considering that Libya, Algeria, Bahrain and the Yemen collectively account for just under 5% of global oil production (with the first two accounting for the vast majority of this number) while the largest conventional oil field in the world (the Ghawar field, accounting for an estimated 6.25% of global production) lies no more than 70 miles away from the end of the King Fahd Causeway leading out of Bahrain. Although it is not expected that the unrest in Bahrain to spill over into other states in the region, it seems reasonable to suppose that the events of this weekend will lead to a increasingly significant risk premium being attached to oil prices.

That Surge in ECB lending

There has been a frenzy of speculation over the past 2 days about what caused the recent surge in ECB emergency lending. Investors have been concerned that a Eurozone bank is in deep trouble, and may be on its last legs. The euro was hit at 08:10 GMT on Friday when the surge in lending lasted for a second day, at which point the market finally realized that it was not due to a fat finger.

Three weekend articles have cleared up the mystery and it's not as bad as it looks. Yes Irish banks are responsible it seems but: it's not new lending - they are simply switching from the standard ECB tenders to the overnight facility
this switching is not a sign of increased desperation on their part - it's because, over the coming days, they want to sell the collateral they normally pledge to the ECB. If you wanna sell your collateral at some point soon, it makes sense not to lock it up in standard tenders that have a 1w - 3m maturity. Overnight is expensive, but it keeps you nimble.

So the Irish banks are in no worse condition today than they were a week ago.

The reason is that two Irish banks are being wound down by the government (already announced weeks ago). The government will, over the coming days, try to auction off deposits (and their corresponding assets, NAMA bonds etc) held at both banks. All told, this comes to about €14 bn (nicely fits with the €16bn the ECB lent out). The banks had previously pledged these NAMA bonds as collateral at the ECB's normal refinancing operations (maturity of 1w to 3m). But now, because they might be sold within days, they can only be used as collateral for, at most, overnight loans (o/n loans are only available at ECB's emergency marginal lending facility).

Space weather could wreak havoc in gadget-driven world

A geomagnetic space storm sparked by a solar eruption like the one that flared toward Earth Tuesday is bound to strike again and could wreak havoc across the gadget-happy modern world, experts say. Contemporary society is increasingly vulnerable to space weather because of our dependence on satellite systems for synchronizing computers, airline navigation, telecommunications networks and other electronic devices. A potent solar storm could disrupt these technologies, scorch satellites, crash stock markets and cause power outages that last weeks or months, experts said Saturday at the American Association for the Advancement of Science's annual meeting. The situation will only get more dire because the solar cycle is heading into a period of more intense activity in the coming 11 years. "Please don't panic," said Stephan Lechner, director of the European Commission Joint Research Center, drawing laughter from the scientists and journalists in the audience. "Overreaction will make the situation worse." The root of the world's vulnerability in the modern age is global positioning systems, or GPS devices, that provide navigational help but also serve as time synchronizers for computer networks and electronic equipment, he said.

Company News

Xstrata Plc: The largest exporter of coal used for power still wants to buy platinum producer Lonmin Plc the Independent on Sunday reported, citing remarks made by Xstrata’s chief executive officer at a private lunch with investors this month.

Air France-KLM and Delta Air Lines Inc. (DAL) are considering a joint bid for

Virgin Atlantic Airways Ltd., the airline controlled by billionaire Richard Branson, the Sunday Times reported, without saying where it got the information. Air France and Delta Air Lines have appointed Goldman Sachs Group Inc. as their adviser, the newspaper said.

Carlsberg 4Q Revenue Falls, Sees Slight Market Improvement '11: Carlsberg,  the Danish beverages producer and distributor, Monday said it expects market dynamics to improve slightly in 2011, especially in Eastern Europe where it anticipates the Russian market to return to growth, as it reported a fourth quarter net profit of DKK301 million, up from DKK383 million the same period last year and against

Diageo , the London-based spirit maker is close to buying Mey Icki Sanayi Ltd. for as much as $2.5 billion and may announce the purchase today, The Wall Street Journal reported, citing unidentified people familiar with the matter.