httpvh://www.youtube.com/watch?v=DOBC5CifVxQ

The bounce in risk as a result of the appointment of Mario Monti
has turned out to be even shorter lived than the bounce we saw as a result of
the appointment of Lukas Papademos as Greek PM. Equities pulled lower and the
euro slipped by a per cent versus the US dollar with investors still spooked by
economics and not soothed by politics.

The Italian debt auction did not go as well as had been expected
either. Bonds totalling €3.0bn in 5yr notes were sold at an average yield of
6.29%, the highest yet in the euro-era and up from 5.32% at the previous
similar auction on 13^th October. Demand was slightly stronger with
traders betting that they would be able to offload these bonds at a higher
price later on down the line to the ECB as they continue to purchase peripheral
debt in the open market. On those bond purchases it has become clear why last
week Italian yields went so bananas; the ECB simply weren’t buying as much as
they used to. The ECB settled EUR4.5bn in bond purchases last week under the
Securities Markets Programme versus EUR9.5bn in the week before. Spanish,
Italian and French bond yields all rumbled higher yesterday and have continued
this morning.

Politics in Germany continued to kick up some interesting
headlines with Angela Merkel’s CDU party voting at its annual conference to
approve a resolution that would allow EZ states to decide to quit the euro.
Obviously this is not a law yet and needs the approval of two other coalition
partners for it to become so but shows the shift in political willpower over
the past few weeks from “out of the question” to a distinct possibility. Merkel
also stated that it is not time for less union in Europe but more “political
union” and once again harkened back to WW2 by saying that “Europe is in its
toughest hour” since the conflict.

Data releases today give us an advance look at German and French
Q3 GDP, expected to be up at faster paces of 0.5% and 0.4% on a quarterly
reading respectively. The Eurozone GDP figure is due at 10am and is expected to
show a steady 0.2% pace of growth according to the consensus forecast. German
ZEW (due 10am also) is expected to show a further slip in economic sentiment in
country, this follows September’s figure that was the weakest since November
2008.

For the UK we have October CPI  with prices expected to haves slipped to 5.1% from
5.2% in September. Core prices are expected to moderate as well to 3.2% from
3.3% previously. This will trigger another round of letters between Mervyn King
and Chancellor George Osborne in which the former will state the reasons why inflation
in the UK has been above the Bank’s 2% target for the past 23 months. We are in
agreement with the BOE that inflation will be tamed over the course of the next
year, as certain extraordinary items fall out of the year-on-year figures. The
main cause of price increases in the UK over the past 12 months was the 2.5%
increase in VAT, introduced in January. The weak pound won’t have helped
either.

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