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

It was another “Groundhog Day” in financial markets yesterday as
equities were pulled lower by the on-going uncertainty in European markets with
currencies remaining volatile within their recent ranges. It looks like more of
the same today with the main bourses in Europe expected to open trading over a
per cent lower and FX seeing little interest in the opening exchanges.

The Spanish debt auction that the market decided to focus upon
will go down as the auction that kicked Spain’s funding issues harshly into the
limelight. Spain sold EUR3.56bn in 10yr bonds at 6.975%, a euro-era high and
obviously as close to 7% as you can get without actually trading the handle.
The previous auction on October 20^th went for an average yield of
5.433% with demand at 1.76. So we can see that, like everywhere apart from
Germany in the EU, yields are rising and demand is falling. Spain is a
difficult economy to call as, like Italy, there is a large cash market in
country. In many ways the fundamentals are worse; a very large and over
indebted banking sector, probably further falls in the housing markets and a
terrible unemployment situation. It seems that the reasons why Italy was
targeted first are two-fold: firstly the size of their debt markets (3^rd
largest in the world) and the dire political situation.

In any case it is likely that champagne will have to stay in the
bottle at the Party Popular HQ when they eventually win the Spanish general
election. Rajoy however needs to come out and say what he is going to do for
the Spanish economy (he has been woefully quiet on the matter so far) and he
needs to do it quickly otherwise markets will get increasingly antsy. The ECB
was active in the markets for Italian and Spanish debt, which helped pull
yields down from the record levels.

We, alongside everybody else, were left slightly mystified by
the rise in UK retail sales in October given the signals from other measures of
consumer sentiment that show people tightening their purse strings. Reports
from High St firms is that most of the 0.6% increase was as a result of
pre-Christmas sales and promotions within stores. The pull of this consumer
demand forward, it stands to reason, may leave a gap come Dec/Jan unless
margins are once again slashed so as to tempt people through the door. Sterling
rallied slightly on the number but has remained in its predetermined range of
1.1640 to 1.1730 against the euro.

It is only second-tier data in the calendar for today so once
again the market will mainly be looking at the European debt situation closer
than anything else. We seem to have drifted back into Europe being a talking
shop with very little actual action taking place. Liquidity, solvency and
confidence issues need to be addressed before we can get down to structural
reforms; why focus on the last hurdle of the race when it’s the one right in
front of you that’s going to trip you up?

Have a great weekend .

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