The chat over the weekend has remained on the political instead
of the economical side of things following Cameron’s decision to use the UK’s
veto to a new EU treaty. The Sunday papers of every political stripe have
covered it from top to bottom so, without any real progression over the
weekend, we will leave it at that except to say that we believe that issues
such as the Irish corporation tax rate will come back to bite the Merkozy axis
sooner rather than later.

We have seen pressure come on to the European leaders via one
ratings agency last week with a credit outlook downgrade issued for all members
of the euro. Overnight we saw Moody’s state that it expects to review its
ratings for the Eurozone through Q1 of next year while adding that they were not
impressed by the resolutions and decisions made at Friday’s summit and that it
“offered few new measures” to resolve the debt crisis.

The immediate effect on rates has been very little with EURUSD,
GBPUSD and EURGBP near the levels they entered the summit on  Thursday
night. The pressure remains on the EU leaders and bond markets as we believe
they must keep the good news flowing through to the market or they risk the
bears coming back and the euro weakening further. The week ahead contains a
good bit of data from the UK alongside important figures from the Eurozone and
some large bond auctions.

Today we have Italy attempting to sell EUR7bn of 1yr debt while
France is looking to get rid of around 6.5bn of short term paper as well. The
curves are no longer inverted for these markets (a sign that yields are higher
for short term time frames and therefore the market is worried about short term
funding) but funding costs do remain high. Short term debt never really gets
too much attention given it can be rolled over pretty easily and, if we do see
high yields, then that is normally as a result of short-term issues that can be
quickly resolved. Italy is at 10am and France at 2pm.

The data calendar is quiet those auctions apart with further
discussion on the political future of the European continent the likely driver
of trade.

Good luck

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