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The markets are still counting down to the conclusion of tomorrow's EU summit and the announcement of a package of goodies by Europe's high command. EURUSD is higher, although European credit markets are lower (yields higher) and stocks are a touch lower since the European open.



· Greece: There are a few more developments for investors to chew over before tomorrow's main event. Firstly, a report in today's FT suggests that EU officials are working on a two-pronged plan to try and help reduce Greece's enormous debt burden. Firstly, debt haircuts may be increased from 21% agreed in June to 60%. Secondly, the new private sector involvement would cover all Greek sovereign bonds maturing out to 2035, previously this had been 2020. This is the type of deal Germany has been pushing for in return for increased support from Berlin. We still don't know if this would be voluntary, and reports suggest that some of Europe's largest financial institutions have hit back at such a large write-down, preferring a 40% haircut. So the stage is set for a clash between lawmakers and bankers when it comes to private sector involvement.

· Reports also suggest that German Chancellor Angela Merkel will present a EUR 1 trillion EFSF rescue plan to the Bundestag tomorrow. The German Parliament will be given the right to vote on leveraging the EFSF on Wednesday, most likely before the summit begins at 1700 BST. Since the plan can't go ahead without German backing, this vote is absolutely crucial. Merkel has already told politicians that the German taxpayer won't have to stump up any more cash, but the outcome of this vote may be a source of major uncertainty for investors as we lead up to tomorrow evening.

· Creating a special purpose vehicle to boost the EFSF is one of the options that EU officials will discuss this week, however Norway's sovereign wealth fund has said it has not been approached to invest in the EFSF. This is another example of how we may get a breakthrough on Wednesday, yet implementation is going to take a long time.

· Spain's 3 and 6-month bond auction has gone ahead without too much stress. Madrid sold EUR3.48bn of debt, just below the target of EUR3.5bn.

· Italy has to auction EUR10bn of debt tomorrow, amidst all of the recent turmoil. Some government ministers have said that the collapse of the government could be necessary to pass much needed reforms to boost growth and lower debt levels.

· Elsewhere: the UK data out today was mixed. The current account deficit was much smaller than expected at GBP2.0bn vs. expectations of GBP9.0bn. However, BBA loans for home purchase were lower at 33,130, vs. expectations of 36,000.

Price action:


· The threat of central bank intervention remains high today. EURCHF continues to weaken, and is back towards 1.2230, while the USDJPY is stable, but at extremely low levels, around 76.10.

· Italian and Spanish bond yields are rising today, reinforcing the contrasting positions of European bond and FX markets.

· The Euro looks comfortable above 1.3900 so far this morning. The latest CFTC data shows that euro longs remain at extended levels, so the single currency continues to get a boost from short covering. However, we expect EURUSD to trade in range in the lead up to tomorrow's summit. Euro weakness is expressed in a declining EURCHF; however this is a dangerous game to play since the SNB remains committed to its 1.2000 floor.

· Stocks are lagging today as conviction disappears. The market is even brushing off good news from some of Europe's largest banks after Deutsche Bank and UBS both reported stronger than expected earnings for the third quarter.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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