httpvh://www.youtube.com/watch?v=S8r70SwbkA8

The market seems happy to take risky assets higher this morning
with the euro looking bid and equity markets forecast to open the week in the
green. This is mostly as a result of Italian President asking Mario Monti to
head an emergency government. Monti is a well-respected economist and former EU
commissioner and is therefore a technocrat in the form of the new Greek PM
Lukas Papademos. He will not be a popular man however as it will be his job to
enact the austerity measures that the Berlusconi administration vacillated over
so much and has caused the issues that Italy now faces. Monti has not committed
to taking on the Premiership and is casting around for ministers to help him;
obviously the longer the time spent without Monti at the front then the more
pressure will be seen on Italian assets and in particular bond yields.

The euro strength has pushed GBPEUR below the 1.17 level while
EURUSD has stabilised above 1.37.

Those yields will once again be back in focus today as Italy
tries to auction off around EUR3bn of 5yr debt. The last 2 auctions have seen
yields rise from 5.32% to 5.81% between early and late October and they closed
at 6.46% on Friday night. I think any result that gives a yield less close to
6% will be viewed as a positive and the euro will continue its slow rumble.

Holding back risky assets somewhat this morning is the
Bundesbank’s rather firm denial that it will not be the lender of last resort
to the Eurozone. The thing that the Bundesbank Chair Weidmann is leaning on is
that it is illegal under European law for the ECB to step in and do such a
thing. But then again it was illegal for countries to be bailed out a couple of
years ago and at the recent G20 leaders admitted that a country may leave the
euro in the future. We are living in a time when all bets are off it seems; the
rules of the past cannot be the rules of the future otherwise the past is destined
to repeat itself.

Today’s calendar will be focused on that Italian debt issue but
we do get some GDP numbers from the PIIGS as well. Portugal’s GDP is due at
10am and is expected to show a contraction of around 0.7%. This would signal
that there has been no growth in Portugal for 9 months with some analysts
suggesting that growth may not return until 2013 in the country. This may not
have too much impact on EUR however this morning as everyone will be focused on
Italy.

We also receive European industrial production which is set to
fall by around 2.3%.

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exchange rates at time of writing