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While it seemed that most of the world was focused on Rupert Murdoch and the kung fu skills of his other half, serious noises were being made in the markets that could have far reaching consequences for both of the significant debt negotiations going on at the moment.

In Europe, the IMF released a statement on the situation saying that the state of ECB financing in the Euro-area was unsustainable and if that the contagion is not dealt with soon then problems in the core of the EU could be seen soon. You could argue that we have already seen an effect with the yields on Italian debt rising close to the 6% level. For a problem that was said to be confined to the periphery it is having a dramatic effect elsewhere. While the IMF statement doesn’t really tell us anything new, it is definitely a hurry up to politicians meeting tomorrow to get something sorted before it is too late.

This is the kind of message that it seems that US leaders have finally got their heads around. Overnight it seems that an agreement proposed by a bi-partisan brigade of Senators has met with approval from President Obama although this is by no means a done deal. The deal would extend the debt ceiling, as needs to be done by August 2^nd, and would cut the nation’s debts by $3.7trn over the course of the next 10 years. These figures are closer to what ratings agencies wanted when they warned that the AAA debt rating could be in jeopardy should a deal not be reached. US treasuries reacted positively while Asian equity markets have pushed onward and gold has fallen by over $20 an oz since its high. The FX market is staying more circumspect however with rates roughly where we were come the London close yesterday.

Risk had been broadly supported yesterday with the FTSE rising for only the 3^rd day in the last 10 as banks bounced back from the large losses they got hit with in Monday’s trading. This was despite poor figures from Goldman Sachs for Q2 however both JP Morgan and Citigroup managed to beat analyst’s expectations helping lift the sector.

Sterling slipped back yesterday ahead of the Bank of England minutes due this morning and the retail sales due tomorrow. We expect that the mention of an increase in quantitative easing in last month’s minutes will not be a one-off and some members will want to emphasise the risks to consumer demand from current inflation and confidence levels. We do not believe however that this will change the voting record and that Adam Posen will be the only one ploughing that lonely furrow. This could be counteracted by warnings about inflation remaining stubbornly high although this argument has lost some weight since the most recent fall in CPI to 4.2%. Even so, we are not bullish GBP through the minutes at 09.30.

Elsewhere we have Italian Industrial Production at 10.00 which could heap pressure back onto the country should it be poor while there is Euro-zone measure of consumer confidence due at 15.00. We doubt it will outperform as the German ZEW measure did yesterday and could cause some EUR wobbles in the afternoon session.

Latest exchange rates at time of writing