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

Wall Street realised last night that the European debt crisis
would have wider consequences than merely problems for the continent’s banks
and the sovereigns to which they belong. As it seems is de rigeur now, a
collapse in risky assets came as a result of a statement from a ratings agency.
Fitch stated that further contagion from stressed Euro area markets poses a
“serious risk” to US banks – the “outlook for the industry is stable…However
risks of a negative shock are rising and could alter this outlook”. The S&P
lost heavily in the last hour of trade although Asian markets have been able to
hold up somewhat overnight and European indices should open the day roughly
flat.

Here in the UK it was no surprise that the general tone of
Governor King’s statement was relatively downcast and we agree with the Bank’s
assertions that inflation should fall through 2012 as certain extraordinary
factors, such as the VAT increase, will fall out of the numbers as long as
political situations in the Middle East don’t cause oil prices to blow higher.
The quarterly inflation report seemed to focus more on the Eurozone than the UK
and the uncertainty in financial markets has led to 17 inflation reports that
have seen growth expectations cut. As a result we see the Bank of England doing
a very simple calculation: poor growth in the short term + falling inflation =
more quantitative easing and we would expect the MPC to vote for an additional
£75-100bn of asset purchases in the February meeting.

This didn’t have quite the negative effect on the pound that we
expected but sterling has remained depressed in the aftermath of his speech and
yesterday’s unemployment numbers. The UK ILO unemployment rate rose to 8.3% in
the 3 months through September from 8.1% in August. This marked a new cycle
high and matched a level last seen Jun 1996. Women seem to be losing their jobs
at 10 times the speed that men are as well which would seem to fit that it is
temporary and seasonal workers who have borne the brunt of the cost cutting
measures by businesses. I also think that it is wrong that ministers seem to be
blaming the European situation for this increase in unemployment; while it will
be a factor in businesses decision making and has brought about an obvious
wobble in confidence, issues at home are far more pressing (housing market
uncertainty, inflation and poor consumer demand alongside poor business credit conditions
for a start).

Sterling finished the day in the mid-1.57s versus the USD and in
the mid-1.16s versus the euro.

Focus will shift back to the Eurozone today after quite a
strange day for the continent. Mario Monti was sworn in as Prime Minister and
unveiled his cabinet. In a rather novel effort to reduce disagreement between
the position of Prime Minister and Finance Minister he has decided to take on
both jobs. There’s a lot to be said for dictatorship obviously. Today he will
present his reform plans to the Senate, after which a confidence vote is
expected in both houses of parliament. Lucas Papademos, the new Greek
technocratic PM, passed a confidence vote against him in the Greek parliament
yesterday while the Irish Prime Minister stated that a credible backstop was
needed in the Eurozone and “ultimately that’s the ECB”. Not what his German
hosts really wanted to hear.

With everyone asking which European country is next we get a
look at how Spain holds up in the firing line today as it auctions around
EUR4bn of 10yr debt while France will try and get rid of EUR7bn of debt from 2
year to 1o year maturities. Spanish yields have opened at Euro-area records
this morning and therefore it is likely to trigger quite a poor auction. In the
UK we have our October retail sales numbers that are expected to show a slip to
-0.3% as consumers once again tighten their belts, this follows the lowest
consumer confidence figure surveyed by the Nationwide in the UK ever; lower
than the Lehman Brothers dip. This will solidify the Bank of England’s view
that growth in the 4^th quarter of this year will prove to relatively
non-existent.

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