httpvh://www.youtube.com/watch?v=RMCj7k8b7DI

The markets’ losing streak had to be broken at some point and
yesterday it was done in resounding fashion. Equities in Europe and the US
pushed higher by as much as 4.5% yesterday as some confidence returned to the
bourses, despite a lack of credible policy and continually poor bond
auctions.

The reason behind the rally remains unclear, but we
believe that is a simple combination of value investors buying up shares that
have capitulated in the past 10 days or so and a hope, more than an
expectation, that the European leaders will come up with something at the next
EU summit due in 10 days’ time. There were mentions of a joint German and
French plan to stabilise and enforce budgetary controls in the EU,
however that seems to have faded out over the course of the day.

Risk remained higher as well despite the latest semi-annual
report from the OECD that showed that the independent think tank believes that
Europe and the UK are set for a double-dip recession – and
that is without the Eurozone blowing up! A complete deterioration in the EU is
not their central forecast however it would trigger a global recession worse
than 2008. They also believe that central banks should continue to keep
monetary policy loose (low interest rates and quantitative easing) through 2012
and expect the Bank of England will bump QE higher in February by an additional
£50bn.

All in all, the Autumn Statement from Chancellor George Osborne
is likely to be a solemn affair. We already know about the credit easing plan
to supplement bank loans to SMEs to the total of £20bn
and the launch of an infrastructure fund to boost Britain’s roads, railways and
such. The hope is that this will boost our attractiveness to investors with
money (Hi Beijing!). The fear, however, is
that the joint publication of the Office of Budgetary Responsibility’s latest
set of expectations for the UK economy will be the second set of figures to
show the country slipping into a double-dip recession. Sources who have seen
the numbers pre-publication have labelled them as “shocking” and that “the
light at the end of the tunnel is fading”. As such we believe sterling could be
in for a tough day today. The Chancellor takes to the Dispatch Box at 12.30 GMT.

Ratings agencies were back in the news overnight as Fitch
decided to leave the US’s credit rating at AAA although they did cut the
country’s outlook to negative i.e. that a ratings cut may be made soon. The
basis of their concern was the so-called Super-Committee’s failure to come to
an agreement over a deficit reduction plan last week. In Europe, La Tribune is
reporting that France may be put on a negative outlook within in the next 10
days unless a plan to deal with the Eurozone’s debts are struck.

Before the Chancellor speaks we have news from Europe in the
form of a massive bond auction from Italy. Yesterday’s auction saw borrowing
costs increase once again with 2-year inflation linked paper going for a huge
7.3%. The auctions today total EUR8bn and although we expect demand to be high
as traders hope to offload to the ECB later on down the line, the yield is
almost certain to stay at unsustainable levels. The term of this debt is also
much more long-term (maturing in 2014, 2020 and 2022) and therefore would leave
the country with a larger interest bill for longer. That is due just after
10am.

We also have Eurozone (10am) and US (3pm) consumer confidence
numbers today, while it was reported this morning that UK house prices rose by
0.4% in November compared to the month previous. This update is signing off on
either a positive or a negative depending on your stance in this housing
market!

Good luck.

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