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Month-end flows, another S&P round of downgrades and a Eurozone finances ministers meeting should ensure another choppy day. Stocks have opened lower for the first time this week and the euro was under pressure during the Asian session. Following the familiar pattern Eurozone bond yields are also higher. Italian 10-year yields hit 7.38% at one point today, although the 10-year -2-year yield spread has started to widen after inverting last week to the relief of Rome. 10-year yields are right now 19 basis points above 2-year yields, which still indicates stress in the bond markets but it seems to be less acute than it was last week.


The Eurozone finance ministers meeting has made some progress, but is it fast enough? Greece will receive its 6th tranche of bailout funds by the middle of next month, but that was about all the concrete measures taken. The EFSF will be expanded, but EU officials declined to set a target, and apparently this fund should be fully operational by early next year - the original deadline had been mid-December. But first the fund needs to attract external investor interest, which hasn't been forthcoming.

We have heard that EU leaders have agreed on a European guarantee of 20-30% on European bonds, but this doesn't seem like a good to deal to me, and is unlikely to attract the interest of cash-rich sovereign wealth funds in the East. But it seems like there is a plan B in the works - with rumours that the ECB could channel funds to the IMF to lend to financially troubled European states. It is worth pointing out that if the IMF is going to take a bigger role in sorting out the crisis then it too needs to boost its funding, right now it has $390bn on hand to lend to Europe, this isn't enough to cover Italy's enormous liabilities and funding needs for the next three years.

German finance minister Schauble said that the EFSF won't halt the crisis and is only a temporary solution at a press conference in Brussels this morning, so the question now is will the meetings in the next two weeks open the way to longer-term solutions such as the ECB taking on the role of lender of last resort and the introduction of Eurobonds. This is what the markets want and until we hear either way the asset markets are likely to remain range bound.

Interestingly, the euro hasn't really recovered from the news yesterday that the ECB hadn't been able to fully sterilize its bond purchases from last week leaving EUR 9n sloshing around the financial system. While this isn't a commitment to QE the timing is key since the markets are calling for monetary stimulus from Europe's central bank. Thus, the taste of what QE would look like in Europe has acted as a weight on the euro, which seems to be gradually losing its buoyancy.

The Eurozone finance ministers meet with their counterparts from the European Union today for the monthly Ecofin meeting. The topic of discussion is how to guarantee the banking sectors' bond issuance to try and get funds flowing to the troubled sector. This is vital to help boost capital levels and ease stresses. It comes in the aftermath of Standard & Poor's ratings rout. Last night the credit rating agency slashed the ratings of some of the world's largest banks and financial institutions. UK banks were also targeted including Barclays and HSBC. The mass downgrades were due to revised methodology used by S&P, which increases the emphasis on the strength of a nation's banking system, explicit/ implicit guarantee of government support during hard times etc. This was in the pipeline so some may say that it is not a big deal as downgrades had been expected, however it highlights the high level of risk for banks and reinforces the challenges ahead.

Europe's banking stock index opened slightly lower today, but since there was some expectation of the S&P slashing ratings it has held up fairly well. Although equity indices are lower in Europe, the relative strength of banking sector suggests that losses could be limited in the short-term while banks hold onto gains from earlier this week.

Economic data is back on the horizon: German unemployment data for October was better than expected. 20,000 jobs were created over the month and the unemployment rate fell to 6.9% from 7%. This is likely to be even more welcomed from Merkel than usual since if things at home are going well then she may have more leeway to enact big changes in Europe.

Ahead today we have Eurozone unemployment at 1000 GMT, which could moderate after the improvement in the German figures and the flash estimate of CPI for November, which is expected to remain steady at 3%. In the US we have the first piece of employment data of the week. The ADP report of private sector jobs growth is expected to show 130k jobs created in this sector, relative to 110k in October. We have a heavy data schedule the next two days, it is month end and on top of that we have headline risk from Europe, so things could be choppy as we head into the weekend.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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