httpvh://www.youtube.com/watch?v=ayhxOT1Pkes

What it took Greece, Ireland and Portugal on average 16 days to
accomplish has been done in Italy within 4. Yields on government debt over a
10yr timescale smashed through the 7% level with little resistance from the ECB
who have been buying Italian debt so as to try and reduce the yield.
Unfortunately the rumoured EUR250m purchase of debt was completely outweighed
by the political problems in the country and the belief that, with Italy in the
same mire as Greece, Ireland and Portugal, that the EU as a whole has crossed a
Rubicon. With the markets lurching from crisis to crisis the only possible
mechanism for Europe to haul itself out of this crisis is to let the ECB print
euros and print them like their life depends on it because, I do not mean to
sound flippant but, the euro’s life does.

The ECB have tried to stymie the increase in Italian bond yields
by buying Italian debt (bond prices move inversely to yields) but they have not
done so in any meaningful manner. If Mario Draghi, the new ECB President, wants
to live up to his “Super Mario” moniker then he needs to throw the kitchen
sink at the problem, not just the plug. Without this bold move from the ECB,
the euro in its current form is in danger of imploding.

One bold move that was reported to have been discussed in France
and Germany was them leaving the Eurozone or at least a smaller Eurozone in
general. While sensible for some reasons, the upheaval would be horrific and we
put the speculation down to backbench politicians more than those in the
cabinet.

Italy has confirmed that it will go ahead with its bond auction
today during which it will attempt to sell around EUR5bn in 365 day paper. Many
had thought they would try and delay this auction given the yields have surged
to an unpalatable 7.54% from 4.5% at the previous auction. I would suspect that
the Italian treasury will be leaning heavily on the Italian banks to buy this
debt and bring some semblance of calm to the markets. There is a larger auction
of 5 year debt pencilled in for Monday.

Headline risk is obvious today from the political uncertainty in
Italy with President Napolitano stating that the austerity plan will be passed
within days and “within a short time either a new government will be formed or
parliament will be dissolved to immediately begin an electoral campaign”.
Berlusconi is looking for the elections to take place once he has left office.

When we’re not chasing rumours we do have some structural data
out today and some major monetary policy decisions at that. No change in policy
or policy statement is expected after the surprise unanimous decision at the
October meeting to increase asset purchases by £75bn over 4 months to £275bn. The
minutes of the MPC meeting showed that the committee understood that the UK
recovery was under threat, from the lack of growth in Europe and elsewhere in
the world and the effect that this will have on the banking system and
liquidity.

Focus within next week’s quarterly Inflation Report will be on
the BoE’s outlook for the CPI taking into account the latest round of asset
purchases.

We expect no change from the Bank of England and very little
sterling reaction. There will be a lot of movement in GBPEUR and GBPUSD however
from the risks posed by Europe; with equities falling USD strength is looking
very likely to continue while Europe’s problems are an albatross around the
single currency’s neck.

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