Markets showed their unhappiness with the fudge that was
Friday’s EU summit yesterday taking equities lower and pushing euro to 9 month
lows versus the pound and 8 week lows against the dollar. For a summit that was
hailed as “the one that saves the euro” it has not given us any new fiscal
framework and the main headline was of course the veto by David Cameron. It
seems to have made very little difference on the markets’ impression of the UK
with sterling one of the best performing currencies yesterday against the haven
flows into the US dollar and Japanese yen. UK debt yields were also lower on
the day as investors switched into our debt from, we presume, debt tied to the
Eurozone with Spanish and Italian yields the main climbers.

This came after a relatively solid auction from Italy of 1 year
paper. They managed to fill the allocation of EUR7bn easily with the bid to
cover level at 1.92 while the yield fell to 5.952% from 6.087% at the previous
auction. It is for once not Italy’s fault that its debt in the secondary market
is being sold with European wide political intransigence the main reason.

We have short term debt auctions today from Spain (09.30),
Belgium (10.30) and the EFSF (11.00). The last one could be interesting given
the prospect of a French downgrade and the knock-on effect that would have on
the EFSF. The auction from the EFSF is only for 91 days however and therefore
may be too small to register.

The main UK news today will be the publication of November’s
inflation numbers. CPI is expected to slip back to 4.8% from 5.0% with RPI
possibly moving back below 5.0% as well. Another letter will be needed between
the Chancellor and Mervyn King to explain why inflation is above target however
we are seeing some improvement as we turn into 2012. The main inflation fear
through 2012 is that on-going tensions in the Middle-East between Israel and
Iran over the latter’s nuclear policy leads to some form of pre-emptive strike
by the former and oil goes bananas as a result.

We also receive German ZEW at 10am with both the economic
sentiment and current situation portions expected to fall once again as survey
respondents remain downcast as a result of the European debt problems. We would
be cautious on holding out for further euro losses today however as the market
tends to snap back from these moves and the risk-on/risk-off mentality of these
markets has been extremely binary. We could see the euro gain a couple of cents
versus the dollar is ZEW is not as bad as expected and auctions go Europe’s
way.

After the European close we have the Fed’s latest decision which
is expected to be a non-event with the committee unlikely to want to rock the
boat in December and, like most other central banks, will want to see what
happens in Europe before they commit to anything else.

Good luck.

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