Democracy’s coming home

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Risky assets slumped heavily yesterday as confusion reigned over the political situation in Greece and the prospects for a referendum over the details of the 2nd bailout package. The FTSE was the best performing equity market in Europe by only falling by 3% with the indices in Greece and Italy plummeting by close to 7%. Where the decision for a referendum has come from is still a mystery but it has ensured that we are in for a sizeable amount of political volatility in the Eurozone until at least January.

The Greek parliament are set to debate Papandreou’s government today, which is believed will lead to a confidence vote by the end of the week, while this evening, Papandreou is scheduled to meet for high-level talks with the German and French leaders, ECB Pres. Draghi and IMF head Lagarde. Even if the confidence vote passes, which is not certain given defections by PASOK MPs, then it is unlikely that the country will go to a referendum The Greek
constitution requires that 60% of MPs vote for a referendum before it goes to the people and I doubt that will ever happen. Even so, it has thrown the cat amongst the pigeons and jeopardises the next payment from the IMF ahead of some hefty bond redemptions in Greece through the early part of December. Euro remained on the rack as you would expect in light of these developments and fell into the 1.36s while GBPEUR narrowly missed out on printing in the 1.17s.

Sterling was helped somewhat by a GDP figure that surprised to the upside. While 0.5% can still be viewed as sluggish growth it will be heartening to see a move away from the fears of stagnation. Retail spending bounced back in September as a result of back-to-school shopping but unfortunately we doubt that we will see the Q4 number match the services growth of 0.7%. There is also no evidence it seems that the August rioting had any impact on the figures, unlike the lack of productivity seen in Q2 as a result of the Royal Wedding and the supply chain shock of the Japanese tsunami.

One figure that shouldn’t get lost in the GDP congratulations is the news that the PMI for the UK manufacturing sector fell back below the 50.0 level denoting expansion; falls in manufacturing production plus the impact of the European debt crisis are already showing that Q4 is likely to be worse than Q3 and our forecast for UK Q4 GDP is a slip back to 0.1%. US manufacturing was also worse than expected although some components led the market back towards
optimism. New orders in the United States remained above 50.0 while the employment component remained resilient. Equities rallied from the lows in the US after the figure and the dollar lost some of its haven lustre as well.

Ahead of the G20 and the meetings between Merkel, Sarkozy and Papandreou we have details of the European manufacturing sector’s performance in October and the Fed meeting which is due at 16.30. The market is expecting
that the Fed will revise its growth projections lower in light of recent sluggishness and fears over the European debt situation. We also expect them to reaffirm “Operation Twist”; their most recent plan to get consumers and businesses spending.

Indicative Rates Sell Buy
GBPEUR 1.1608 1.1636
GBPUSD 1.6000 1.6022
EURUSD 1.3765 1.3788
GBPJPY 124.92 125.20
GBPAUD 1.5365 1.5392
GBPNZD 2.0075 2.0105
GBPCAD 1.6223 1.6254
NZDUSD 0.7962 0.7982
GBPZAR 12.78 12.83
USDZAR 7.9884 8.0230
GBPPLN 5.1081 5.1385
EURJPY 107.48 107.76

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