The meetings between European leaders kicked off yesterday with a little soiree between Angela Merkel and Nicolas Sarkozy in Berlin. While the press conference yielded little that was new, there was a confidence that a treaty to reinforce budgetary discipline in the European Union would be signed by the end of the month and, at the latest by March. They also continued talks on the Financial Transaction Tax that caused so much rancour before the turn of the year, forcing Cameron to use the veto to protect the City. It looks more and more likely that the EU will go for something that will just cover their industry; which seems idiotic to me.

The big news in FX markets yesterday was more of a gossip story than an economic story. The Chairman of the Swiss National Bank resigned after coming under criticism for apparently not knowing that his wife, a former FX trader, took a position in USDCHF a couple of weeks before the SNB imposed its floor. The value of her position rocketed and she pocketed around $80k. Hildebrand always maintained that he knew nothing of his wife’s exploits but, without being able to prove it, he has had to fall on his sword. From an economic point of view this changes little at the SNB. The new Chairman is cut from the same policy cloth as Hildebrand and the Bank has said that they will defend the EURCHF 1.20 floor with “utmost determination”. CHF was volatile in the afternoon session but has settled down since.

Asian shares have moved higher overnight as the belief that the authorities in China will move soon to stimulate the economy and prevent a “hard landing” for the world’s largest exporter. Imports fell dramatically in trade figures released overnight which may force the PBoC to think about cutting the reserve ratio requirement (RRR) sooner rather than later. The RRR is the amount of cash that banks in China must hold in reserve and not lend out; the higher the figure, the more difficult it is to get credit from a bank. A cut in this ratio would allow banks to lend more and keep businesses consuming, or at least that is what the theory says.

The world’s second largest exporter also posted some poor figures yesterday with industrial production for November slipping by 0.6% compared to an expectation of a 0.5% fall. This increased fears that a contraction in growth in even Germany is now almost certain; a situation that even the most bearish analysts were loath to consider 12 months ago.

The fear in the markets was exemplified by a German bond issuance that, for the first time ever, went out with a negative yield. This means that investors were in fact paying the German authorities for the ability to lend them money. Investors have been buying up German, alongside UK debt, since the crisis began in the belief that the assets formed some form of “safe haven”. It seems that some investors are happy to look at a return OF their money as opposed to a return ON their money.

The main focus today will be a bond auction from Austria at 10am this morning. We don’t tend to look at Austrian debt that often but, although the issue is small, it will give us a view as to whether the Austrian state is experiencing the same funding pressures as its banking sector. Austrian banks have been hit hard, as have all European banks, in the past year by problems in the funding market but Austrian banks have been big lenders to Central and Eastern Europe, an area that has fallen under the microscope after last week’s fun and games in Hungary.

Good luck.

Latest exchange rates at time of writing