httpvh://www.youtube.com/watch?v=UFNvKN5s06k

Another poor day for the single currency on Friday prompted yet
another weekend of rumours surrounding possible financial mechanisms that could
swing into action to once again ride to the euro’s rescue. Thing is, nobody
told the people who are meant to be doing the rescuing and the subsequent
denials and confusion only serves to exacerbate the uncertainty that markets so
fear. This weekend’s rumour was propagated through Italian media and centred on
a EUR600bn bailout for Italy from the IMF. The money would be lent by the ECB
to the IMF and then the IMF would lend it to Italy; quantitative easing by the
back door in essence. The IMF have since said there are no plans to lend this
money to Italy and we’re all back to square one. Which is not a great place to
be.

Friday showed just how nervous this market is surrounding
Italian funding measures. Short term debt (anything with a term of less than 2
years) doesn’t tend to get too much press as yield oscillations can be the
result of short-term measures and not be an accurate reflection of a country’s
future, hence why the market tends to use 5 and 10 year bonds as more of a benchmark.
Investors asked for a yield of 7.81 per cent for the 2-year bond, up from 4.63
per cent last month. The six-month bills saw yields of 6.50 per cent, up from
3.54 per cent. This was higher than Greece paid on similar term money earlier
in the month and heightened the belief that Italy will need some form of
financial support beyond the ECB buying its debt.

That denial from the IMF and a paper from Moody’s suggesting
that all European credit ratings (this means you Berlin) are at risk from the
Eurozone debt crisis have clipped the risk rally’s wings a tad as London opens
up, but equities are poised to pull positively after Europe finished in the
green on Friday for the first time in 9 sessions.

It is an important week for the pound with the publication of
the Chancellor’s Autumn statement, his 2^nd most important statement
after the Budget. The Sunday papers were fall of details of Osborne’s plan for
a £20bn national loan guarantee scheme to companies whose annual turnover is
less than £50m. It is likely that the statement is a negative for UK assets
(GBP and gilts) and takes place tomorrow morning. We have seen sterling higher
this morning, versus the dollar, on the slight rally in risk that we are
experiencing and an article suggesting that China’s CIC sovereign investment
fund are looking at large investments in the UK in infrastructure.

Focus will remain on European debt markets today and this week
with large auctions from Italy, Spain, France and Belgium planned over the next
5 days. More eyes will be focused on an Italian auction of inflation-linked
debt than anything else and may be the wall that stops this slight euro
recovery in its tracks. There’s a fair bit of niggly data today with Italian
business confidence (11am) and US new home sales (3pm) the likely headline
makers and, although EURUSD looks bad this morning, a reversal may occur later
in the day.

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exchange rates at time of writing