httpvh://www.youtube.com/watch?v=gEKXj82zhVM

With the markets seemingly viewing Italy through the crosshairs at the moment it was up to Silvio Berlusconi to attempt to calm investors’ minds. In a speech to the Italian government the President said the markets are not correctly assessing the situation in Italy and stressed strong fundamentals. Unfortunately the one thing that the Italians need now is growth and with an average yearly growth rate of merely 0.25% over the past 10 years something radical must be changed. There were no new initiatives in the speech, no new fiscal plans and nothing that we think will arrest the slide in Italian assets in any meaningful manner. Ideally we were looking to see austerity measures put into place at the front end of 2012 and a strong program of privatisation.

At the beginning of the day we had seen the euro on its knees versus its main crosses however intervention by the Swiss National Bank to weaken the rocket ship that is the Swiss Franc managed to allow the euro to strengthen. The SNB decided to cut the interest rate on holding Swiss Francs by 2/3rds and now, once you factor in inflation, investors are now receiving negative real interest rates on deposits I.e. paying to hold the franc. This will act as a break on further CHF strength but a full-scale reverse will only come from an improvement in the global macroeconomic outlook. The Japanese also joined in the currency weakening party by pledging to inject 10 trillion yen (about £77bn) into the economy to try and protect their battered export market. It has worked slightly but more will be needed to move it away from the post war high range it finds itself in.

Data from the UK surprised us to the upside yesterday with good news coming from our services sector. As we all know the services industry makes up around 75% of the economy and therefore an increase in the fortunes of the service sector will have a proportionally larger impact on GDP than say construction. The PMI rose to 55.4 from a previous level of 53.9. Whether this is a result of retailers opening their summer sales earlier than in previous years will become evident in next month’s numbers but would tie in with the better than expected retail sales number seen a couple of weeks ago. This may be a case of higher numbers here in exchange for lower numbers later in the quarter. Sterling pushed back up to the 1.64s versus the US dollar but was unable to breach the 1.15 level versus the euro.

It is of course central bank day in Europe and the UK today. The Bank of England decision will be a formality and we expect no change on rates nor on the quantitative easing side of things. There may be some slight weakness after the announcement as the market switches its view to the Quarterly Inflation Report next Wednesday but we doubt this will be too extreme. The ECB meeting will, given what’s happened in the previous 4 weeks, be more interesting. We expect Trichet will announce a resumption of the ECB’s bond buying programme in order to prop up the peripheral bonds of Spain and Italy, which should give the euro a little bit of bite. If he shies away from the plan however we could be in for a European massacre.

There is also a Spanish bond auction due at around 10.30 which will likely see yields remain close to their post 2000 highs.