New week, new optimism

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Another poor day for the single currency on Friday prompted yet another weekend of rumours surrounding possible financial mechanisms that could swing into action to once again ride to the euro’s rescue. Thing is, nobody told the people who are meant to be doing the rescuing and the subsequent denials and confusion only serves to exacerbate the uncertainty that markets so Fear. This weekend’s rumour was propagated through Italian media and centred on a EUR600bn bailout for Italy from the IMF. The money would be lent by the ECB to the IMF and then the IMF would lend it to Italy; quantitative easing by the back door in essence. The IMF have since said there are no plans to lend this money to Italy and we’re all back to square one. Which is not a great place to be.

Friday showed just how nervous this market is surrounding Italian funding measures. Short term debt (anything with a term of less than 2 years) doesn’t tend to get too much press as yield oscillations can be the result of short-term measures and not be an accurate reflection of a country’s future, hence why the market tends to use 5 and 10 year bonds as more of a benchmark. Investors asked for a yield of 7.81 per cent for the 2-year bond, up from 4.63 per cent last month. The six-month bills saw yields of 6.50 per cent, up from 3.54 per cent. This was higher than Greece paid on similar term money earlier in the month and heightened the belief that Italy will need some form of financial support beyond the ECB buying its debt.

That denial from the IMF and a paper from Moody’s suggesting that all European credit ratings (this means you Berlin) are at risk from the Eurozone debt crisis have clipped the risk rally’s wings a tad as London opens up, but equities are poised to pull positively after Europe finished in the green on Friday for the first time in 9 sessions.

It is an important week for the pound with the publication of the Chancellor’s Autumn statement, his 2nd most important statement after the Budget. The Sunday papers were fall of details of Osborne’s plan for a £20bn national loan guarantee scheme to companies whose annual turnover is less than £50m. It is likely that the statement is a negative for UK assets (GBP and gilts) and takes place tomorrow morning. We have seen sterling higher this morning, versus the dollar, on the slight rally in risk that we are experiencing and an article suggesting that China’s CIC sovereign investment fund are looking at large investments in the UK in infrastructure.

Focus will remain on European debt markets today and this week with large auctions from Italy, Spain, France and Belgium planned over the next 5 days. More eyes will be focused on an Italian auction of inflation-linked debt than anything else and may be the wall that stops this slight euro recovery in its tracks. There’s a fair bit of niggly data today with Italian business confidence (11am) and US new home sales (3pm) the likely headline makers and, although EURUSD looks bad this morning, a reversal may occur later in the day.

Indicative Rates Sell Buy
GBPEUR 1.1614 1.1649
GBPUSD 1.5461 1.5487
EURUSD 1.3283 1.3308
GBPJPY 120.09 120.38
GBPAUD 1.5717 1.5741
GBPNZD 2.0600 2.0627
GBPCAD 1.6082 1.6112
NZDUSD 0.7496 0.7516
GBPZAR 12.99 13.04
USDZAR 8.3920 8.4734
GBPPLN 5.2378 5.2790
EURJPY 103.17 103.43

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