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Stocks in Europe are lower for a second day today. The markets are still moving in unison so bonds are higher while risky FX is coming under pressure. EURUSD is below 1.3700, which opens the way to 1.3600, while AUDUSD fell below key support levels after some dovish minutes from the RBA, the next support level of note is 1.0030/35.

The near-term outlook for risk doesn't look good after the Vix, Wall Street's fear gauge, jumped above 30 yesterday. This suggests that we could be in for a choppy period of range trading for the foreseeable future.

Although the main drivers of this move are fundamental, it is interesting that the rally over the last few weeks was on fairly thin volume and reports suggest that real money - longer-term investors - stayed on the side lines foregoing the gains in risky assets that saw the Aussie rise nearly 10 per cent and the euro jump 6 per cent. This should set off warning bells, since it suggests that speculative or flighty investors all rushed into risk at the same time, so now we could see a major push for the exits.


· Europe is still centre stage after Moody's, the credit rating agency, said that France's triple A credit rating is under pressure and it would put the second largest country in the Eurozone on review for a potential downgrade. France's public finances are among the weakest of its triple-A rated peers. This makes an enlargement of the EFSF rescue fund that would require greater guarantees from member states less likely since France cannot commit to provide more funds without threatening its credit rating. This has been reflected in the French and German 10-year bond spread widening to a record and EURUSD dipping below 1.3700.

· Germany dampened expectations of a swift solution to the debt crisis yesterday and seemed to be managing down expectations for a quick fix at this weekend's EU summit. Combined with Moody's announcement on France, this has caused optimism in the market to abate. The market is now realising that the European crisis is a complex beast and a solution this weekend is unlikely to materialise.

· China is also causing market worries. The economy expanded at 9.1% in Q3, the weakest pace for 2 -years. However, there were some pockets of good news: retail sales rose by a 17.7% annual rate in September, while industrial production is up 14.2% year to date. Although the markets' immediate reaction was to sell risk on the news, authorities in Beijing may see the moderation in growth in the last quarter as a sign that its programme to slow the economy and rein in inflation is working. Chinese authorities have been on a tightening campaign, and they are finally seeing the fruits of their labour. A 9.1% annual growth rate is still good and is strong enough to create employment. However, since Europe is China's largest trading partner its fate will determine the strength of Chinese growth going forward. Due to this, we don't expect any more tightening this year and we also think that a re-val of the renminbi is unlikely.

· Portugal is the latest Eurozone country to announce that it would miss its deficit target for 2011, this follows Spain and Greece. If the fiscal data doesn't start to improve then market sentiment is unlikely to improve.

· The Reserve Bank of Australia's minutes from its meeting earlier this month were on the dovish side and point to a cut in rates as soon as November. Without its yield support we could see the Aussie fall back towards parity while risk remains on the back burner.

· Corporate earnings and economic data are in focus today. Goldman Sachs and Apple are the highlight for earnings. Banking results from Citi bank and Wells Fargo yesterday were lower than expected and suggested that housing market woes could be growing with re-defaults (defaults on mortgages that have already been re-arranged to make it easier for the borrower to pay) an increasing phenomenon. Overall, earnings season for Q3 has been a disappointment especially for banks and the banking sector is leading overall stock markets lower in both the US and Europe.

· Economic data highlights include UK CPI at 0930, the German ZEW at 1000, US producer prices and Fed chairman Ben Bernanke who is speaking in Boston at 1815.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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