Risk continues to run on hopes for Friday

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The rally in risky assets ground to a halt yesterday on the back of the S&P decision to put the European continent on a negative credit watch but Asia has picked up the baton overnight. Asian markets are broadly up this morning as hopes remain that the European leaders meeting on Friday will come up with some decisive measures to deal with the debt crisis. The French Finance Minister has said this morning that much of his country’s, and probably a few others, credit ratings are dependent on Friday’s summit – no deal probably equals a downgrade.

I am more hopeful of an agreement coming out of Europe than I have been for a while, maybe it’s the first signs of Christmas cheer! Obviously there are significant hurdles to overcome in the meantime and whenever politicians get involved the market tends to err on the side of pessimism. I think Sarkozy will have to cede some of his desire to keep things sovereign and my belief is that within 5 years we will have a complete fiscal union in Europe.

The confusion over the long-term funding of support operations in Europe was evident last night with commentators talking about a second European bailout plan. This would see the existing European Financial Stability Fund run alongside the new European Stability Mechanism and also incorporate new involvement from the IMF. There is a lot of pie in the European sky it seems. Firstly the EFSF is now, rating downgrade depending, almost dead in the water with S&P also putting its credit rating on a negative outlook yesterday. Secondly, they can’t even fill this fund with cash so I am unsure,without the ECB getting involved, where these funds come from and thirdly, US Treasury Secretary Geithner, was pretty clear that further funds from the IMF are going to be difficult to come by in the future given US congressional oversight on donations to the fund. Markets are rallying however.

Focus returns to the manufacturing sectors of Europe and the UK today and the Europeans will be hoping for a jolt higher after yesterday’s surprise German factory orders increase of 5.2%. Unfortunately, as we have said before, a strong Germany is detrimental to the rest of Europe economically in the long term but may give the euro a further boost this morning. Following a few poor manufacturing PMIs in the UK we suspect the UK industrial production figures will also be poor with the market expecting a contraction of 0.3% through October.

Other factors to be aware of today include a German 5yr auction of debt which will hopefully cause fewer headlines than the 10yr auction 2 weeks ago that caused some people to prophesise the end of the world because the Bundesbank priced it badly and it wasn’t fully covered. We also have the NIESR estimate of November’s growth in the UK which is expected to be 0.5%.

Once again, we emphasise that fundamentals are all well and good in normal market conditions however it will be headlines and comments from the EU that continues to drive sentiment and trade until Friday at least.

Indicative Rates Sell Buy
GBPEUR 1.1597 1.1625
GBPUSD 1.5597 1.5603
EURUSD 1.3432 1.3455
GBPJPY 121.15 121.42
GBPAUD 1.5154 1.5180
GBPNZD 1.9953 1.9981
GBPCAD 1.5721 1.5750
NZDUSD 0.7807 0.7826
GBPZAR 12.45 12.50
USDZAR 7.9783 8.0129
GBPPLN 5.1701 5.1998
EURJPY 104.28 104.55

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Risk continues to run on hopes for Friday

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