httpvh://www.youtube.com/watch?v=RGoeW0g4lWA

European markets remained under pressure yesterday with
continental bourses all losing ground yesterday while the euro stayed under
pressure. News on the political front was sparse but Mario Monti has said that
he will meet with President Napolitano to announce his cabinet today. As we
highlighted on Monday, the longer that the political situation goes unresolved
the more risk it holds of pulling the euro lower. There were rumours yesterday
that Monti is looking to serve until the end of 2013 although some politicians
are said to be increasingly annoyed at the appointment of a technocrat with no
political experience over a long-time politician.

The on-going fears surrounding debt levels and the resolution of
their imbalances saw peripheral bond yields remain high versus that of Germany
and non-European AAA rated countries. Pressures have been seen in Portugal,
Spain, France, Belgium and Austria in the past 24hrs.

The 2 speed global recovery was evident yesterday with advance
retail sales in the United States exceeding the consensus forecast of 0.3% to
post an increase of 0.5%. Sales in 7 of the 13 categories were said to be
faster with electronics the leader. We would suspect that this is as a result
of the release of the new iPhone. Even so, we have started to see the data from
the US improve markedly in the past month while releases from other developed
nations have remained weak. Like it or not, the global economy rests on the
consumption of the average American and we need them to pick it up some in the
coming months.

Eurozone GDP rose at a steady pace of 0.2% in Q3, in line with
the consensus forecast, but there were pockets of failing strength. While
German growth accelerated to 0.5% from 0.3% we saw French GDP rise 0.4% in Q3
but the Q2 figure was revised down to -0.1% from a stagnant 0% originally.
Figures from Spain and Belgium were also flat while the Netherlands slipped
-0.3% and Portugal by -0.4% and Greece’s was a horrific 5.2% lower from this
point last year. Italy have not released their numbers yet. I’m sure there’s a
joke there.

The most closely watched event today will be the Bank of
England’s Quarterly Inflation Report. CPI in the UK fell yesterday to 5.0% from
5.2% in September. 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. This means only one thing in our eyes; further
quantitative easing past February (when the latest injection of £75bn is
expected to run out).

We expect the meeting to be a net negative for the pound as
Mervyn King has a habit of talking down sterling when he gets in front of a microphone
and while questions will be about the UK economy he will be keen to emphasise
that the problems in the EU have direct effect on the UK. For that reason I
think he will tip his hand towards further QE in the UK if we do not see a
pickup in the fortunes of the developed world through Q4.

Latest
exchange rates at time of writing