Political appointments not enough

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The bounce in risk as a result of the appointment of Mario Monti has turned out to be even shorter lived than the bounce we saw as a result of the appointment of Lukas Papademos as Greek PM. Equities pulled lower and the euro slipped by a per cent versus the US dollar with investors still spooked by economics and not soothed by politics.

The Italian debt auction did not go as well as had been expected either. Bonds totalling €3.0bn in 5yr notes were sold at an average yield of 6.29%, the highest yet in the euro-era and up from 5.32% at the previous similar auction on 13th October. Demand was slightly stronger with traders betting that they would be able to offload these bonds at a higher price later on down the line to the ECB as they continue to purchase peripheral debt in the open market. On those bond purchases it has become clear why last week Italian yields went so bananas; the ECB simply weren’t buying as much as they used to. The ECB settled EUR4.5bn in bond purchases last week under the Securities Markets Programme versus EUR9.5bn in the week before. Spanish, Italian and French bond yields all rumbled higher yesterday and have continued this morning.

Politics in Germany continued to kick up some interesting headlines with Angela Merkel’s CDU party voting at its annual conference to approve a resolution that would allow EZ states to decide to quit the euro. Obviously this is not a law yet and needs the approval of two other coalition partners for it to become so but shows the shift in political willpower over the past few weeks from “out of the question” to a distinct possibility. Merkel also stated that it is not time for less union in Europe but more “political union” and once again harkened back to WW2 by saying that “Europe is in its toughest hour” since the conflict.

Data releases today give us an advance look at German and French Q3 GDP, expected to be up at faster paces of 0.5% and 0.4% on a quarterly reading respectively. The Eurozone GDP figure is due at 10am and is expected to show a steady 0.2% pace of growth according to the consensus forecast. German ZEW (due 10am also) is expected to show a further slip in economic sentiment in country, this follows September’s figure that was the weakest since November 2008.

For the UK we have October CPI with prices expected to haves slipped to 5.1% from 5.2% in September. Core prices are expected to moderate as well to 3.2% from 3.3% previously. This will trigger another round of letters between Mervyn King and Chancellor George Osborne in which the former will state the reasons why inflation in the UK has been above the Bank’s 2% target for the past 23 months. We are in agreement with the BOE that inflation will be tamed over the course of the next year, as certain extraordinary items fall out of the year-on-year figures. The main cause of price increases in the UK over the past 12 months was the 2.5% increase in VAT, introduced in January. The weak pound won’t have helped either.

Indicative Rates Sell Buy
GBPEUR 1.1690 1.1716
GBPUSD 1.5902 1.5928
EURUSD 1.3586 1.3610
GBPJPY 122.40 122.67
GBPAUD 1.5625 1.5652
GBPNZD 2.0566 2.0596
GBPCAD 1.6205 1.6235
NZDUSD 0.7722 0.7742
GBPZAR 12.75 12.80
USDZAR 8.0134 8.0499
GBPPLN 5.1463 5.1743
EURJPY 104.60 104.87

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