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Tight ranges and a fairly positive bias has been the order of the day. Stocks in Europe have opened relatively flat while EURUSD has managed to sustain a ranger just above 1.30 between 1.3005 and 1.3045.

It's Friday, so the rumour mill has started chugging again. The first is about the prospect of a cut in China's reserve requirement ratio, which is positive for risk. This comes after the USDCNY fix today was surprisingly low and there were signs of large-scale dollar selling by Beijing. As if to balance market sentiment the second rumour is that Spain and Italy will be downgraded by S&P after the market close this evening. The credit rating agency has a habit of downgrading Europeans late on a Friday night and S&P put 15 out of 17 Eurozone members on negative watch earlier this month, so if it does make the move it wouldn't be totally out of the blue. The real surprise could be the market taking the news in its stride.

Italian and Spanish bonds yields have continued to moderate today. Italian 10-year yields have fallen by 50 basis points in the last two days. Downgrade, what downgrade? The bond market either pays no heed to rumours or it ignores credit rating agencies...

The French have been out to get the UK again, this time the governor of the central bank said that the UK should be downgraded before France. Surely this is a diplomatic no-no, but it highlights how far the British/ French relationship has deteriorated in recent months - now even central bankers are getting spiteful. 10-year UK Gilt yields are higher, but that is not down to comments from Paris, rather Gilts along with other safe havens are faltering as sentiment towards risk picks up as we head to the end of the week.

Fitch was also out in force last night, downgrading the largest US and European banks. This is unlikely to have a major impact on the markets as Fitch is playing catch-up, S&P downgraded banks last month. Although the Eurostoxx banks index is lower today it hasn't weighed too heavily on other sectors in European equity markets which are relatively flat. However, it reinforces how weak the banks' positions are. Every time their ratings get cut it costs them more in terms of capital requirements. This is difficult to quantify as it depends on counterparties, exchanges' requirements etc, but Citigroup have said that for every 1 notch downgrade it costs them $ 5 billion in extra capital requirements. So the cumulative effect of downgrades is negative as it comes at the same time as banks try to navigate the sovereign debt crisis and boost capital levels.

Things are likely to be range -bound today as investors cut positions before the weekend. Added to this, some people may be heading off for the Christmas break, so capital could be left on the side-lines from now until the New Year. Next week is fairly light in terms of economic data and government debt auctions, which may solidify ranges for some time.

A central bankers' conference in Rome today that includes ECB President Draghi, Bank of England Governor Mervyn King and a host of Fed members will add to headline risk later. Also, US CPI data could cause a flurry of excitement if we get a surprise; economists expect no change in core YoY CPI of 2.1% for November.

Expect silly rumours to permeate this type of market. If the Chinese do cut the RRR this is good news for the Aussie and risk in general. EURGBP is in the tightest range I have seen for a while between 0.8380 and 0.8395, although it remains incredibly weak within its long-term range. Gold is making up some gains after being battered this week. It is up $25 per ounce so far today, but expect $1,600 then $1,620 - the 200-day sma it fell through so easily on Wednesday, to be key levels of resistance.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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