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Risk assets are in a positive territory this morning after shrugging off the downgrade of Italy and Spain by credit rating agency Fitch after the close on Friday. Stocks have been driven higher by expectations of an accord between France and Germany and a concrete deadline, the end of October, to get a comprehensive plan together to 1, re-capitalise the banking sector and 2, fundamentally overhaul the economic workings of the currency bloc. Last week's central bank action to support the markets (BOE) and ensure the banking sector has all the liquidity it needs (ECB) may also be adding to the positive tone to risk. However, although stocks are higher, expect volatility this week.


· Europe's stocks are flat to slightly higher today; the FTSE is up about 0.25%; however the mood in the markets is still cautious. Firstly, although France and Germany have given a deadline to come up with the plan, we have no idea what that plan will be and the two leaders were not willing to give details. Added to that, the EU has failed to resolve the EZ crisis over the last two years, so three weeks to come up with the be-all and end-all solution seems a bit rich. Thus, stocks are higher but volumes are low, suggesting that investor conviction that a solution will be found remains low.

· Europe's Eurostoxx 600 banking sector is lower today due to news that a Greek bank had to be nationalised, which has weighed on the overall sector. The banking sector has led the overall stock market in recent weeks, so this may be a sign that the rally in stocks is running out of steam.

· Corporate fundamentals in view: this week Q3 corporate results are due. There have been a large number of profit warnings this quarter, which have added to the poor performance of stocks during recent months. It will be future expectations that investors will really want to know about, so watch out for the guidance companies give about whether they think profits will pick up in the last 3 months of the year. This is particularly important for retailers as we move into holiday season.

· It should be a quiet day as the US is out on holiday.

· Dexia is back in the news after Belgium nationalised the retail banking unit. The CEO is speaking right now, saying that re-capitalisation is not the answer for Dexia, as this is essentially throwing good money after bad... an interesting view point given that German and French leaders are focused on this as a solution to the sovereign debt crisis.

Price action


· Stocks still look vulnerable from both a fundamental and technical perspective. Many of Europe's stock markets are actually stuck in a range and haven't fully recovered from August/ September declines. The FTSE 100 needs to break out above 5,400, Eurostoxx above 2,350, Dax above 6,000 and the Cac above 3,200 before we can get excited that this is a true recovery rally.

· The euro is higher after Friday's wobble. Interestingly EURUSD managed to find support above 1.3350 - a key support zone and Fib level. Above 1.3480 opens the way to 1.3660. However, the euro is still highly correlated with risk, so is vulnerable to changers in investor appetite. Above 1.3500 this pair may start to look overbought on a short-term basis.

· The euro is one of the best performers in G10 today. EURGBP is testing resistance at 0.8650, the next resistance level of note is 0.8730 - a cluster of hourly smas. The risk is that the euro won't have the strength to break out of its range against sterling, which could on other euro crosses.

· AUDUSD is also higher today. Above 0.9850 opens the way to 0.9920/30 - the 21-day sma.

· Credit markets are also bid with yields across the Eurozone all lower. For this to be sustained, we need to see the details of the plan promised by Merkel and Sarkozy after their Sunday summit.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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