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

I hope you all had a relaxing long weekend; it was not relaxing for avid market watchers. Over the past 4 days we have had a downgrade to Spain’s sovereign debt and doubts over the French equivalent, the resignations of a UK coalition minister and the German President, reports of killings and injuries of people on boats carrying supplies for Gaza, political movements in China to tax property speculation and last but not least, the Eurovision song contest.

We’ll start in Europe with Spain’s downgrade. Fitch lowered their rating of Spanish debt by one notch to AA+ from AAA on fears of a slower than expected recovery in an economy that makes up 11% of EU GDP. Unemployment is still high and bearing in mind that the Cortes only passed the austerity bill by a single vote shows a lack of support for Zapatero’s minority government.

Although there was no comment from the ratings agencies over the French side of things Christine Lagarde, the French Finance Minister, noted that France’s AAA rating was maybe ‘a bit of a stretch’. Both of these announcements weakened the euro in late Friday trade but it recovered in Monday’s session.

It will stay under pressure however due to mounting political pressure in Germany. President Kohler, a friend and ally of Chancellor Merkel, unexpectedly resigned from the largely ceremonial post over comments he made about the mission of German forces in Afghanistan. After the election in North-Rhine Westphalia which saw Merkel’s party lose seats in the German Upper house and the resignation of another senior party member only 1 month ago, it shows that the state of German politics is not great and at a time of high economic uncertainty, political rancor may cast further doubt on the success of the euro.

The Germans did have one thing to cheer however; they were victorious in this year’s Eurovision. In the clearest form of political voting since the East German ice skating judge, Germany’s entrant Lena, swept to victory. Surely a lot of national debt could be paid down if we sold back all the sequins  and ditched the hairspray though?

 Back in the UK the coalition suffered its first real body blow of its short life as David Laws, the Chief Secretary to the Treasury, resigned from his post after revelations over his private life and the misallocation of his expenses. There was no ‘smart talk’ over this; Laws is well respected and was ideal for the position that he had in the cabinet. David Cameron, George Osborne et al must now assuage the market’s fears that his replacement, Danny Alexander, is up to the task.

While these matters were all important at a local and national level the truly international geo-political story of the weekend was that of the armed Israeli incursion on to an aid flotilla. This has heightened fears of another setback to the peace process in that part of the world. Israeli nuclear submarines are said to be stationed off the coast of Iran while Turkey, the country under which the aid ship was flagged, will be escorting further conveys with destroyers from its navy. Turkey is part of NATO, Israel however is not. Should the Israelis kick off again, Article 5 (an attack on one NATO member is an attack on all NATO members) could come into force.

So, starting the week with all that in mind we expect dollar strength today as equity markets falter at the open today; we are currently lower against the dollar than we were this time Friday. In data we have UK manufacturing PMI at 09.30 with the EU equivalent just before 9am. German retail sales have already been published at a higher rate than expected however, given the political fears in Germany, have not been able to halt the euro’s slide. We round off today’s data calendar with US Manufacturing ISM.