httpvh://www.youtube.com/watch?v=2bM4_fbs_7Q

The political will, or lack
thereof, to find a deal in the US over the issue of a $1.2trn deficit reduction
plan made sure that it was yet another negative start to the week. Equities
smeared lower and the pound, for a few other reasons as well, was the biggest
faller on the currency boards.

The bipartisan “Super Committee”
or “Committee” as they now will forever be known by, released a
statement last night outlining the fact that a decision by the 23rd was
unlikely. We had known this was probable since the beginning of trading and
risk was sold broadly throughout the session with AAA debt, the dollar and the
yen the main beneficiaries. Things normally work in America when lawmakers put
guns to their own heads but in this instance it looks to have failed miserably.
With no agreement reached $1.2trn will be pulled from the defence budget and
domestic departments at the beginning of 2013. Ratings agencies are yet to
comment on these negotiations but any communication will have a whiff of
downgrade about it.

The fall in sterling was also as
a result of the words “deficit” and “reduction”. David Cameron admitted in a speech
yesterday that the government’s austerity measures were behind schedule and
that the remaining high levels of debt will drag on output. The repairs to
balance sheets in households, businesses and, indeed, the government itself is
still on-going and this is the problem. Chancellor George Osborne had said in
March that the current structural deficit would be eliminated by 2014-15
however this looks likely to be extended to 2015-16 when the autumn statement
is released on November 29^th. Sterling rattled to a 6 week low
against the dollar and a 3 week low versus the euro as a result and will remain
wobbly in the short term.

With focus split between the
Europe and the US at the moment it is crucial to hone in on what actually
matters today. There has yet more anxiety surrounding European credit and in
particular that of France over the past 24hrs. While French debt yields are not
trading near the levels it hit earlier in the month they are still a full 1.5%
higher on a 10yr term than that of Germany. Moody’s published a report
yesterday that stated “any persistent increase in borrowing costs would amplify
the French government’s challenges as growth slows”. I think it has become
clear that France is not trading like a AAA rated piece of debt and therefore
is prone to a downgrade. That would be a game-changer especially for the
process of funding the EFSF; if France’s debt is not AAA then neither is the
EFSF’s. Maybe that would be the fissure that prompt the Germans to allow the
ECB to run the printing presses.

Structured data is thin on the
ground today with UK public sector borrowing due at 09.30 and the second print
of US GDP for Q3 at 13.30. We also have the minutes of the latest Federal
Reserve meeting at 19.00 which we suspect will emphasise the challenges to the
US growth position moving forward and will be viewed by the markets as laying the
ground for further QE later on down the line.

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