The issues that everybody knew the EU have came to the fore yesterday as traders, back at their desks after a summer break, leapt into haven currencies and safer assets and dismissing the euro.

The USD, CHF and JPY all rallied hard while equity, commodity (gold excepted) and the euro slumped. Most of the move was on the back of a news story published in the Wall Street Journal that we mentioned yesterday. The banking sector, the article maintains, will need a lot more government support as the recent stress tests underestimated the level of sovereign bonds these institutions were holding. These fears were compounded by the news that Portugal’s banks borrowed a record amount of money from the ECB as they struggled to raise what was needed in private markets. This affected all major banks with Barclay’s lower by 2.7%, RBS down 1.7% and BBVA down 2.2%

Investors weren’t done however with the peripheral EU countries (Portugal, Ireland, Italy, Greece, Spain) all seeing the cost of insuring  their sovereign debt against default rise against that of Germany’s. As we have pointed out beforehand Germany is the only thing keeping the EU going; once that slows then the area is in real trouble. And you know what? Data is already showing cracks in the German armour. Yesterday German factory orders slipped by 2.2% and this morning we have seen their trade surplus also suggest that GDP growth in the country is likely to slip in the upcoming quarters.

To finally lump on Joseph Stiglitz, a Nobel Prize winning economist, warned that the spending cuts in the EU area were a ‘disaster’ and that the EU would be heading to more economic difficulties as a result, with the UK also negatively affected.

All of this together has seen GBPEUR climb back towards the 1.21 level and EURUSD slump back towards 1.27. GBPUSD did make a downside break below support at 1.5320 however overnight has retraced higher with Halifax house price data punching it to an overnight high of 1.5430. The Halifax reported that house price rose by 0.2% in August against analysts expectations of -0.5%.

Other data releases today include UK industrial and manufacturing production which we are tipping to head lower following last week’s poor PMIs. They are due at 09.30 while US MBA mortgage applications are out at 12.30.