httpvh://www.youtube.com/watch?v=NkQjkCzQ-04

The rally in risky assets ground to a halt yesterday on the back
of the S&P decision to put the European continent on a negative credit
watch but Asia has picked up the baton overnight. Asian markets are broadly up
this morning as hopes remain that the European leaders meeting on Friday will
come up with some decisive measures to deal with the debt crisis. The French Finance
Minister has said this morning that much of his country’s, and probably a few
others, credit ratings are dependent on Friday’s summit – no deal probably
equals a downgrade.

I am more hopeful of an agreement coming out of Europe than I
have been for a while, maybe it’s the first signs of Christmas cheer! Obviously
there are significant hurdles to overcome in the meantime and whenever
politicians get involved the market tends to err on the side of pessimism. I
think Sarkozy will have to cede some of his desire to keep things sovereign and
my belief is that within 5 years we will have a complete fiscal union in
Europe.

The confusion over the long-term funding of support operations
in Europe was evident last night with commentators talking about a second
European bailout plan. This would see the existing European Financial Stability
Fund run alongside the new European Stability Mechanism and also incorporate
new involvement from the IMF. There is a lot of pie in the European sky it
seems. Firstly the EFSF is now, rating downgrade depending, almost dead in the
water with S&P also putting its credit rating on a negative outlook
yesterday. Secondly, they can’t even fill this fund with cash so I am unsure,
without the ECB getting involved, where these funds come from and thirdly, US
Treasury Secretary Geithner, was pretty clear that further funds from the IMF
are going to be difficult to come by in the future given US congressional
oversight on donations to the fund. Markets are rallying however.

Focus returns to the manufacturing sectors of Europe and the UK
today and the Europeans will be hoping for a jolt higher after yesterday’s
surprise German factory orders increase of 5.2%. Unfortunately, as we have said
before, a strong Germany is detrimental to the rest of Europe economically in
the long term but may give the euro a further boost this morning. Following a
few poor manufacturing PMIs in the UK we suspect the UK industrial production
figures will also be poor with the market expecting a contraction of 0.3%
through October.

Other factors to be aware of today include a German 5yr auction
of debt which will hopefully cause fewer headlines than the 10yr auction 2
weeks ago that caused some people to prophesise the end of the world because
the Bundesbank priced it badly and it wasn’t fully covered. We also have the
NIESR estimate of November’s growth in the UK which is expected to be 0.5%.

Once again, we emphasise that fundamentals are all well and good
in normal market conditions however it will be headlines and comments from the
EU that continues to drive sentiment and trade until Friday at least.

Good luck.

Latest
exchange rates at time of writing