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Yesterday we alluded to a closely choreographed week which
European leaders have planned to bring confidence and stability to their
region. This was working well through the European session until, at around
19.00 UK time rumours that the ratings agency Standard & Poors were looking
to put a negative outlook on the 15 European nations who didn’t already have
one (Cyprus and Greece were already rated as negative). This was confirmed at
21.00 UK time with a formal announcement that the entire region is on watch for
a downgrade as a result of politicians’ failure in finding a solution to the
debt crisis alongside tighter credit conditions and the probability that the
Eurozone will fall into recession through Q4. So, that includes Germany, France
and the Netherlands alongside Finland among others as in jeopardy of losing
their AAA rating.

Earlier in the day we had seen risk move higher as Merkel and
Sarkozy’s press conference was well received by the markets. Merkel gave way on
private bondholder involvement in losses, marking the Greek example as a
one-off, so as to show that  Europe was a “safe place to invest”. They
also agreed to bring forward the launch of the European Stability
Mechanism  (ESM) to next year from 2013. This is a permanent rescue fund
for the Eurozone and will act as an intra-European IMF to help in future
crises. The EFSF looks dead in the water following the rating agencies
overnight moves and headlines that say that the future of the Eurozone’s rescue
mechanisms look uncertain are completely true.

Risky assets are off heavily this morning as a result of the
ratings agency moves with euro lower against its crosses, equities back in the
red and core European bond yields all moving higher.

Away from the debt crisis, problems
surrounding growth in the EU were also made evident yesterday as the services
PMIs from the EU showed that the first quarter of recession in the Eurozone
will be Q4 of this year. The composite index (combination of manufacturing and
services) was below 50.0 for the 3^rd month in a row and unless
German consumers go bananas at the tills for Christmas, then a negative GDP
figure is certain.

The UK services sector is not giving up without a fight it seems
and is now the fastest growing in Europe although this is not difficult given
the problems on the continent. We are unsure however how much of this increase
is as a result of pre-Christmas sales on the High St as this will simply drag
demand forward from later in the year. That being said, this does solidify
expectations that Q4 GDP in the UK is unlikely to be negative but we should not
expect any great strides either. Our expectation is for growth of 0.1% in the
last quarter of 2011.

Overnight we saw the Reserve Bank of Australia cut interest
rates by 25bps for the second month in a row. We expect a rate cut from the ECB
on Thursday at their meeting while the Bank of England are unlikely to move. To
register for Thursday’s monthly “Bank of England and European Central Bank
Webinar” click here

As if to emphasise Standard and Poors’ fears over a lack of
growth in the Eurozone, today we receive the latest GDP figures from the area
with the market expecting a QoQ rise of 0.2% and a YoY of 1.4%. The rest of the
data calendar is quiet today although, as Europe has been for a while now,
political and rating agency comment on last night’s announcements are likely to
dominate.

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