Italian Prime Minister Silvio Berlusconi has taken a leaf out of Papandreou’s book and handed in his resignation after losing a vote of confidence. However he will not step down until parliament has approved another austerity package. The prospect of fresh guidance in Athens and Rome has been enough to persuade investors that all is not yet lost and a solution will be found for the debt crisis.
Euro was slightly up against the pound this morning as markets reacted positively to this news however this was not enough to change the dynamic of the Euro. The Euro gain has been reversed and Sterling is now at an eight month high of 1.1715 against the Euro as it is clear Italy’s debt woes are escalating. Yield on Italian 10 year bonds are at 7% which is unacceptable; this is the highest since the euro was founded in 1999. Meanwhile in Greece, they need to commit to the austerity measures or there is an outside chance they won’t receive the much needed bailout.
Ultimately it seems risk is back on…yesterday’s data was more positive than the market had been expecting for the global economy. Germany’s trade surplus widened in September to a €15.3bn. UK manufacturing production grew by 2% in the year to September and industrial production shrank by -0.7%, less than the expected -0.8%.
Today Britain’s goods trade deficit widened in September to its highest since 1998 after a record rise in imports. The numbers indicate the crisis in the euro zone has had a direct impact on Britain’s exports. Economists are sceptical about the surge in imports given the situation in the UK, in the domestic economy speculating a pull back in October’s figures.
A drop in retail sales in October suggests we are in for a poor Christmas. With high inflation, rising unemployment and a slower growth in average wage rises a surge in retail sales over the festive period is unlikely. The BoE may need to revisit its quantitative easing strategy if Italy is forced out of the euro and the Euro club breaks up. The UK, which is expected to contract over the next six months, would be severely hit by a collapse in the Euro and would need more QE to prevent Britain following the Eurozone in to a possible recession during the winter.
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