httpvh://www.youtube.com/watch?v=nnvn-SnVyVQ

There is a lot to get through from yesterday and so we might as
well get George Osborne’s statement out of the way and save the political
ding-dong to the people who enjoy that sort of thing. The fact is that the
Autumn Statement had very little impact on the markets with sterling and gilts
actually rising on the day versus the US dollar and euro. Europe remains the
number one concern for the markets at the moment it seems and even though we
saw growth rates cut for this year to 0.9 per cent from 1.7% in March and for
2012 to 0.7% from the earlier forecast of 2.5%, the market remains happy to be
long sterling.

One thing that George Osborne hung his speech on yesterday and,
to a certain extent since he came into office, was that the UK would keep its
credit rating at AAA. A shot was fired across the UK’s bows last night by Fitch
however with ratings agency warning that while “policy response does
demonstrate a continuing commitment to placing UK public finances on a
sustainable path…….. the capacity of UK public finances to absorb adverse
economic and financial shocks that would result in yet higher public debt while
retaining its ‘AAA’ status has largely been exhausted”. In layman’s terms it
means that should we see a big bank topple over or the fallout from a European
implosion reaches our shores then we may see that rating downgraded. I think
this is less of a problem than most people anyway. Our AAA rating is only still
in place as a result of our central bank being independent and the same
explanation can be given for why gilts are so highly sought at the moment. As
long as we have a central bank that has an unlimited backstop of cash to fall
back upon, a slight change to our credit rating would not be the end of the
world. Sterling was also little moved on the Fitch statement.

Another ratings agency got more press last night by acting on
the worldwide banking sector. S&P reviewed the ratings of 37 major banks
around the world after changing its model to reflect the funding risks of
individual countries. Not all banks were downgraded but the major ones to be
affected were Goldman Sachs, Bank of America, Morgan Stanley and UBS. This
happened after the market close and while the shares are not trading at the
time of writing we have seen moves back into haven currencies overnight.

Part of this may be as a result of, although the Eurogroup
meeting last night signed off on enhancements to the EFSF, leveraging of the
Fund will fall short of the EUR1trn that had been expected (preliminary
estimates put the number somewhere closer to EUR600bn). We also saw that the
latest Greek loan tranche was approved, with disbursement expected by
mid-December although this is of little consequence in the short term and is
little more than a shot of painkillers to a terminally ill patient.

Italy’s debt auction was predictably expensive yesterday with
all rates auctioned exceeding 7%. The funny thing is that the market looked at
the auction and said that “as long as it was not above 8%, that’s relatively
ok”. Strange days. Even so, these funding levels are of course unsustainable
and will lead to more pain further down the line for Italy.

There are no bond auctions to worry about today however we still
have a raft of data from the continent. German unemployment is due to remain at
7.0% when released at 8.55am with the entire EU figure due at 10am. Here in the
UK there is a general strike occurring of public sector workers as a result of
changes to their pension pots. This is unlikely to have too much effect unless
things get out of hand and a protest turns into a riot.

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