httpvh://www.youtube.com/watch?v=LXjp9KTUhvY

The risk rally that was born as a result of the central bank
intervention in to the dollar-funding markets continued yesterday with the euro
managing to strengthen once again versus the US dollar and the pound. Equities
remained at the levels they had accelerated to, however, further gains were
hard to come by. So now the central banks have bought the European politicians
some time by unjamming the interbank lending markets and allowing them to focus
on the deep-set issues that the European Union is experiencing

Yesterday we saw Nicolas Sarkozy make an impassioned speech to a
crowd in Toulon about the dangers that the French economy faces. The contents
of the speech were relatively simple: tighter fiscal discipline and a national
oversight of budgets with penalties for countries that exceed them.
Unfortunately for Monsieur Sarkozy, this was the only speech he could give and
has pretty much guaranteed that he will lose next year’s French general
election.

In Germany we also have Angela Merkel addressing the Bundestag
to set out proposals for a fiscal union i.e. centralised tax and spending
policy and not merely centralised interest rate policy. The thing is that she
is also very likely to give risky assets a kicking by once again emphasising
that the ECB will not become the “Lender of Last Resort” and quantitative
easing is not likely.

This stands apart from hints from Mario Draghi, ECB president,
however. Yesterday in a speech to the European government he said that while
strong rules on public finances will become the most important part of bringing
credibility and stability back to the Eurozone, “other elements might follow,
but the sequencing matters”. This has widely been interpreted as the ECB
ramping up its bond programme of purchasing peripheral debt. One report I’ve
seen believes that this may include the purchase of the debt from ALL Eurozone
countries; another plan to institute quantitative easing by the back door.

On the subject of bonds, European bond yields fell yesterday on
strong auctions from France and Spain. Although yields were higher than
previous auctions they were lower than the market price at the time and strong
demand was seen as well. Most of the demand will have come from banks who will
wish to use that debt as collateral with the ECB against short term loans but
this is good news all the same. What wasn’t good news was the broad slip in
manufacturing PMIs seen in Europe and the UK yesterday. Both the UK and
Euro-wide measures were below 50.0, showing that the manufacturing sectors are
contracting and growth is now non-existent. The important services numbers are
due on Monday.

Today is Non-Farm Payrolls day in the US and therefore we expect
trade to be quiet in anticipation of the figure at 13.30. This is caveated by
news from the Bundestag; -  Angela Merkel always has the ability to throw
things out of kilter.

Good luck and have a good weekend.

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