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

Yesterday gave the markets the opportunity to take stock of the
recent turmoil in financial and political circles and trade was less volatile
as a result. The euro managed to erase some of its recent losses versus the
USD, GBP and other crosses but will remain vulnerable in the short term.

Good news from the political side of things has come from both
Greece and Italy in the past 24hrs with potential succession sagas nipped
swiftly in the bud. The long running favourite to take over in Greece, Lukas
Papademos, has now become the interim PM in Greece through to elections due in mid-February
while it seems that Mario Monti will likely take over from Silvio Berlusconi as
the Italian PM.

Both are more “technocratic” than
political in their makeup; Papademos used to be Vice President of the ECB while
Monti is a well-respected economist and former European Commissioner. They know
how to get things done in Europe and should bring some stability to their
respective spheres of influence. I think the market will be happy if emphasis
is now able to shift back to the relative economics of the problem as opposed
to the intransigence of the political system and its participants.

The Italian bond auction passed
ok yesterday with all EUR5bn in 12m bills being sold the yield, The yield came in at 6.087%
versus 3.570% at the previous sale on 11Oct, and although below 7%, is a
significant increase. Yields in other Italian debt maturities came lower over
the course of the day as the ECB maintained its bond buying programme but
stepped it up a notch. Dealing desk reports put the figure purchased at around
EUR3.2bn, significantly more than the estimated EUR350m that was spent on
Wednesday when Italian yields first went atmospheric.

The
focus will remain on the problems in Greece and Italy however the most common
question in markets and in meetings is who is next? Some people are putting
their money on France and, behind Greece, their debt was the worst performing
globally yesterday. The spread of French debt over German, a typical measure of
risk, rose to its highest level in euro-area history and rumours swirled that a
debt downgrade was forthcoming. Standard & Poor’s in fact clarified that
France’s credit rating is AAA, after sending a statement earlier to some
clients that suggested the rating had been changed in error. An investigation
is taking place into how it happened and the world has breathed a sigh of relief
as a result. My money, for what it’s worth, is on Belgium given their lack of a
government and the markets’ focus on political stability. Any pain in Belgium will
also be felt in France due to their entwined banking system unfortunately; Dexia
was a canary in the mineshaft and not merely a lone damsel in distress.

In the UK the Bank of England
decision was the damp squib that everyone knew that it would be. No policy
changes were announced with interest rates left at 0.5% and the asset purchase
target at £275bn The minutes of the previous MPC meeting showed that the committee
understood that the UK recovery was under threat, from the lack of growth in
Europe and elsewhere in the world and the effect that this will have on the
banking system and liquidity. Focus within next week’s quarterly Inflation
Report will be on the BoE’s outlook for the CPI taking into account the latest
round of asset purchases.

Today’s data calendar is relatively light with only UK producer
prices at 09.30 and US consumer confidence at 14.55.

Have a great day and a relaxing weekend.

Latest
exchange rates at time of writing