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It seems like it could be a quiet close to the week (famous last words). It is Veterans Day in the US; although the S&P is open volumes could be patchy. Added to that Eurozone debt crisis-fatigue is likely to keep people on the side-lines today. Overall, there is a positive tone to the markets however, we remain in range-trading territory and headline risk is still an issue.

Price action in EURUSD, gold, stocks and commodities is telling us that the markets' fears about an immediate collapse of the Eurozone have been scaled back for now, however, there is still a lot of uncertainty out there and there are very few raging bulls to be found.


The markets love political stability, because only once politics are stabilised can Europe's debt problems start to be dealt with. Thus, the markets have been much calmer in the last two days because of a few developments: 1, Greece has a new government of technocrats, 2, Italy could have an emergency caretaker government combined with a new leader, Mario Monti, in the next few days, 3, Italy is set to pass fresh austerity measures and 4, the ECB has stepped into the bond market in size, which has had a marked effect on Rome's borrowing costs.

Although problems still remain, the political changes are considered a good thing by the government. For Italy an emergency government could push through key austerity measures and growth reforms before elections early next year. This may help to de-politicize the steps Italy needs to take to ensure stable debt dynamics in the future.

The same is true In Athens. Greece has faded to the side-lines in the past week as new PM Papademos is due to be sworn in later today. He will lead an interim government until elections are due in February. The new government is now set the task to implement a EUR130bn bailout deal agreed at the Oct 26th EU summit.

Although the outlook is still gloomy, investors are looking on the bright side: a clean political slate may (and it's a big might) be able to pass crucial reforms without the political brinkmanship and bickering that have caused such turmoil in the markets in recent months.

But as usual in Europe the weekend is full of event risk. The Italian Senate is due to approve next year's Budget today, with the Lower Chamber expected to vote tomorrow. There is no margin for error right now, and Italy has to pass this Budget. Italy's borrowing costs may have fallen dramatically in the last 24 hours (they are currently at 6.55% - a full 100 basis points below the high reached on Wednesday) but the media is still speculating on how Italy could get bailed out.

Consensus seems to be building that Italy could get assistance from the IMF rather than the ECB. Italy needs to raise approx. EUR300 billion next year and even though borrowing costs have fallen they remain extremely high and would still cost Italy EUR20bn just in interest. Combined with a weak growth forecast for the southern European nation - of just 0.1% next year - Rome may still struggle to control its finances, so Monti has a tough job ahead of him.

Elsewhere, the market seems to be brushing off any negative headlines today. German economic minister Roesler rejected the idea of the ECB as lender of last resort. That leaves the EFSF rescue fund, however its CEO Regling said that the current turmoil makes the prospect of leveraging up the EFSF to EUR1 trillion much more difficult since foreign investors want to extend loan loss guarantees from 20% to 30%. This means that the fund may only be enlarged to EUR800bn. This would barely cover Italy's borrowing needs over the next three years which stands at approx. EUR 570 billion.

It seems like the taboo about a member state leaving the Eurozone has finally been done away with. The German CDU party (Merkel's party) has backed a motion to allow euro-members to voluntarily exit the currency bloc. This is the first step to enmesh this in the Lisbon Treaty and open the way for major structural changes in the way the Eurozone works. This could weigh on the euro this morning.

Elsewhere, Spanish growth in the third quarter was in line with expectations at 0%. This could have been worse due to the drop in confidence over the quarter; however it is still an extremely difficult time for Spain's economy to be stalling and could aggravate Madrid's public finances even more. This hasn't impacted EURUSD, which is making another stab at 1.3650. Above here opens the way to the top of the recent range at 1.3840/50. Support is still 1.3550 then 1.35.

In the UK, producer prices were weaker than expected suggesting that inflationary pressures are (finally) starting to subside. The pound is looking weak today. A break below 1.59 opens the way towards 1.57 - a key support zone. EURGBP is higher today although it has failed in an attempt at 0.8600. Support lies at 0.8550.

Ahead today University of Michigan consumer confidence data in the US is released for November at 1455GMT. It is expected to come in higher at 61.5 versus 60.9 in October.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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