httpvh://www.youtube.com/watch?v=NNiy4XFLLBc

I’m not sure how many times we have been told that this is a
“crucial week for the Eurozone” in the past 12 months but the total can
increase by one once more. Deals on a fiscal union within the Eurozone are said
to be closer than ever following empassioned speeches by Sarkozy and Merkel on
Thursday and Friday respectively, although there
are still divisions over possibly the most vital point of the deal; whether
countries within this union should be penalised if budget levels are broken.
Sarkozy is unwilling to let these powers go  and Merkel will get another
crack at persuading him to do so today before the scheduled Eurozone meeting at
the end of the week. No announcements are expected from the Merkel/Sarkozy
meeting which means that any announcement that is forthcoming has the ability
to be a bombshell.

This week has been choreographed by European leaders to put over
an air of confidence and capability to the markets. The opening dance was from
Italy with Mario Monti’s technocratic government approving austerity measures
and further fiscal tightness. The changes and spending cuts total around
EUR30bn over the next three years. Some of this will be ploughed back into the
economy to try and get Italy working again with particular focus being put on
the young and female unemployment.  Other measures such as another VAT
increase may come through in the second half of 2012 if needed.

Friday’s trade was slow as markets waited for, and then
digested, the November Non-Farm payrolls figures. Payrolls increased by 120k,
just below the consensus figure of 120k however, the unemployment rate fell
from 9.0% to 8.6%. While that seems like good news a part of it will be as a
result of the “participation rate” falling as well. This rate measures the size
of the labour force versus those of the same age and unfortunately falls are
not seen as a positive i.e. the fall in the unemployment rate is not as a
result of people getting jobs but instead as a result of people falling out of
the labour force. We saw risk trade in a fairly whippy manner through the
afternoon session but without any real direction.

Markets have opened positively so far this morning on the back
of the Italian news with Italian bond yields the best performers of the day,
coming in by 7bps. Equity markets are expected to open in the Green as well and
the euro is looking resurgent once again this morning. We are still in our
well-defined ranges on GBPEUR (1.14-1.17) and GBPUSD (1.54-1.57) and we expect
that the market will eagerly attempt to push the euro higher and dollar lower
on good exchanges coming from meetings surrounding the Eurozone’s future.

Following the poor European manufacturing numbers from Thursday
we get a look at the services sector today with Italy (08.45), France (08.50),
Germany (08.55), Europe as a whole (09.00) and the UK (09.30) all set to report
that growth in the services sector is set to remain negative or very weak
indeed. The UK number surprised to the upside last month as pre-Christmas sales
tempted shoppers on to the High St. We will see whether that trend has
continued or whether the demand was simply poached from months further down the
line. We also receive Eurozone retail sales at 10.00 and US ISM at 15.00.
Fundamentals are all well and good but are about as permanent as a rainbow at
the moment and the focus will remain on Europe.

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exchange rates at time of writing