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The circus rocks up to Brussels today as Eurozone finance ministers meet at 1600 GMT. This is the usual monthly meeting that is set to discuss two things: firstly how to leverage the EFSF rescue fund and secondly to (finally) approve the 6th tranche of bailout funds for Greece that are now about a month late.

The stunning rallies in risky FX and equities yesterday fizzled out at the start of the European session. Equities were up more than 5% in Europe on Monday, yet there was still some stress in the bond market. Also, although the euro rallied, it didn't break above any key levels, which suggests that it could weaken further and the 1.3150 level is still in view. Likewise, the FTSE 100 has stalled at 5,320 - the Tenkan line and top of the Ichimoku cloud and a key resistance level. We think that choppy range-trading conditions in equities and FX will persist until the EU summit at the end of next week.


Europe remains centre stage: Italy is set to auction EUR8bn of 3, 9 and 11 year debt at 1000 GMT. Its entire yield curve is now above 7%, so the risk is that 3-year debt is sold for a similar yield to the 11-year debt. The 10-year-2-year Italian bond yield spread has inverted once more after moving into positive territory yesterday as risk appetite gained traction. However, today's debt auction may well reinforce that Italian borrowing costs are completely unsustainable. New PM Monti is stuck between a rock and a hard place - it is tempting to cancel an auction since Italy has got cash and doesn't actually need to auction debt today, but if it cancelled the auction it would cause a major wave of panic in the markets causing its bond yields to spike even more.

The Finance Ministers' meeting in Brussels sets the stage for the EU summit on December 9th. It is likely to come up with proposals to leverage the EFSF. However, there are some stumbling blocks regarding this: foreign investors don't seem to be forthcoming and the insurance proposal may not be large enough to entice more money to the fund. This is deeply concerning, and if today's Italian debt auction does not go well then investors' fears will be heightened since as it stands there is no rescue net large enough to deal with Rome especially after the IMF denied it was planning a EUR 600bn loan for Italy.

So although risk rallied yesterday it wasn't a major turning point and European bond yields remain at elevated levels. We pointed out yesterday that the 12-month euro swap rate had continued to decline and since this usually has a strong positive correlation with the single currency it is no surprise that the euro gave back some gains after failing to breach 1.34.

The UK will also be in focus. The Chancellor gives his autumn statement at 1230 GMT today. The UK has no money to spend so expect his statement to be fairly gloomy. Deficit targets are likely to be pushed back and growth is likely to be revised lower. The markets have been prepped for the Chancellor's announcement that the target to eliminate our budget deficit by 2014/15 will be pushed back a year to 2016/17. Likewise, most people expect growth forecasts to be revised lower. The IMF expects the UK growth to be a paltry 1.1% next year and has said that the UK economy continues to suffer and may need to delay austerity to boost growth. However the Chancellor is unlikely to deviate from his plan A as this could turn the spotlight on the UK and push up borrowing costs. On paper the UK is anything but a safe haven, however Gilt yields continue to attract safe haven flows that keep our borrowing costs low. So the UK is inadvertently benefitting from the crisis in the currency bloc.

The Chancellor needs to defend our triple A credit rating and keep borrowing costs low, so don't expect any major revisions to the government's fiscal plans. We think Osborne will deliver a cautious, measured and decidedly dull statement to avoid rocking the boat, and although sterling may be volatile today we think it will trade in its recent range between 1.5450 on the downside and 1.56 on the upside.

Data is fairly second tier today, although watch out for Eurozone confidence data (expected to be lower) at 1000 GMT, and US house prices, which may pare their rate of losses at 1400 GMT.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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