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Risk sentiment is mixed today, however the euro and the Aussie dollar are both higher so far and for most of this week stocks have followed these two currencies closely. We expect markets to remain fairly quiet until we hear more from the G-20 finance ministers' meeting in Paris. The foreign press suggest that there will be global pressure on the Europeans to fix the sovereign debt crisis. However, we think markets may lack conviction until the 23rd October - the EU summit. Expectations are building that concrete actions will be agreed and taken to solve the Eurozone crisis once and for all. However, cracks may appear: is leveraging the EFSF the best idea? Could bank re-capitalisations actually make things worse for sovereigns? Only yesterday was the EFSF expanded to EUR440 billion - now deemed woefully inadequate at dealing with the European mess. Thus, the recent market rally seems a bit presumptuous when structural change in the Eurozone moves at a glacial pace.

Market Themes:


· Chinese inflation growth slowed to 6.1% in September from 6.2% in August - the lowest level since May. The money supply also moderated, which suggests that inflation pressures, although elevated, are starting to decline.

· Food inflation is still high, but reports of harvests for this year are good, so food prices may come down over time.

· Growth in China is now in focus data for Q3 is released next week, growth is expected to fall to 9.5% from 9.6% in Q2. Risks are increasing to the downside for China due to slowdowns in the EU and US. Thus, the outcome for Europe will determine 1, global growth expectations and 2, Chinese policy action in the medium-term. Until the European crisis is solved China is likely to keep policy change on hold and refrain from allowing the renminbi to appreciate.

· Chinese FX reserves at the end of September stood at $3.2 trillion. Some of this could be diverted to helping Europe overcome its sovereign crisis. Reports today suggest that China is keen to help finance the IMF to directly intervene in Europe through bond buying programmes etc. However, could China do more for its economy if it spent its money internally by boosting a social safety net thus helping domestic demand to grow?

· Stocks in Europe have opened a tad higher, but the markets still have to overcome some major technical hurdles like 5,400 in the FTSE 100 and 1,220 in the S&P 500. Going forward, the main driver of equities may be their cheap prices. P/E ratios remain around 2008 lows; however volatility is likely to remain high.

· European CPI is expected to remain at 3% last month; the detail of the report is expected to show broad-based price pressures. The ECB is likely to remain on hold due to price pressures, although they will keep providing liquidity to the banking sector. Cutting rates, when real rates are negative, won't have much of an impact on the economy.

· US retail sales are expected to have jumped by 0.7% in September. This could be due to a bounce in auto sales due to a recovery in the Japanese supply chain. More important to determine the future of consumption in the US will be consumer confidence released later this afternoon. It is expected to rise to 60.2 from 59.4 last month. However, even if it does pick up to this level it will remain at a very depressed level.

· The Spanish downgrade by S&P followed Fitch's move last week. This is hardly surprising after the downgrade to Spanish banks earlier this week. The risk for Spain, and all economies trying to implement fiscal austerity, is slowing growth that hurts tax revenues coming into the government coffers. Spain is expected to miss its fiscal targets for this year, but it is unlikely to be the only one. The UK's fiscal targets also look optimistic at this stage.

· A report in the Telegraph could gain traction today. It says that RBS remains the most vulnerable bank in Europe and could be forced to raise GBP17bn in fresh capital, according to Credit Suisse. It has been a bad couple of days for banks in Europe and the US. Morgan Stanley and GS had their ratings downgraded yesterday, while Deutsche Bank may also have to raise EUR9bn if EU authorities force banks in the currency bloc to re-capitalise. In recent months the banks have been pivotal to determining the direction of overall stock markets. So the latest news flow from the banking sector is not positive for risk.

· Watch out for the Italian confidence vote for Berlusconi. He is expected to pass, but there is expected to some changes to his government.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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