The tone as we start the European session is one of lethargy. European stocks have run out of steam and are following Asian stocks lower. It's been one hell of a Q3, and the excitement of recent weeks is likely to continue over the next three months.

We end the quarter no closer to a long-term solution to the European sovereign debt crisis, the Bank of England looks poised to do more QE, it could even be joined by the Fed at some stage and the global economic outlook is still a confusing picture. The EUR is looking weak, parity seems a long way off for the Aussie dollar and stocks, which have had their worst quarter since 2008, look fragile. Will there be another leg lower for risk, or will Germany save the Eurozone and cause a huge relief rally? These are the questions we grapple with as we enter the last three months of the year.

Themes:

· New Zealand lost its triple A credit rating overnight from Fitch and S&P, which means there are only 10 countries left with triple A ratings and 6 of them are in the Eurozone (yet the Eurozone has a sovereign debt crisis...) This has knocked risk sentiment as it is another example of how debt concerns can flare up globally as investors start to scrutinise public finances . This is likely to be a long-term theme and going forward, if there isn't some improvement in the debt levels of France and the UK they could be next to see their triple A status stripped.

· Germany may have approved the EFSF yesterday but the vote, although crucial, is relatively obsolete since the G20 has already said that more needs to be done then just expanding the EFSF to its full lending capacity at EUR440bn. Its reaction on markets was fairly muted.

· Although Spanish and Italian debt auctions were well subscribed Rome and Madrid had to pay much higher interest rates than at previous auctions. As we end the third quarter Italian bond yields have fallen from a high of nearly 6.2%, however after reaching a low of 4.95% in August, they are creeping higher and end the quarter at 5.55%.

· Interestingly, Irish bonds have been one of the best performing assets throughout the Q3 market turmoil. Yields have fallen from a high of 14.07% in July to 7.52% - a stunning rally. Although the ECB may have partly helped to support Irish bonds, it also shows that bailed out nations can improve if they declare all of the bad debt on their books, recapitalise their banks with state money and implement strict austerity budgets ... could this be the blueprint for the solution to the crisis?

· The markets may be fairly quiet as we wait for next week's main event risks: Ecofin meeting on Monday, ECB meeting on Thursday along with the BOE meeting and the usual start-of-the-month economic data deluge.

· The Troika is expected to finish its review of Greece on Monday. The government still has to approve labour market reforms and a draft 2012 budget and due to this there will be an extraordinary cabinet meeting on Sunday. Watch out for some fun and games pre the Asian open.

· Commerzbank has revised its ECB rate forecast; it now expects two rate cuts in Q4 2011 and Q1 2012.

Market Update:
· EURUSD bounced off support at 1.3500 - the next key resistance level is 1.3670 - the 200-hr sma.
· EURGBP: moved higher along with EURUSD, but it remains stuck in a stubborn range between 0.8670 - 0.8720.
· The dollar and the yen are still well bid, but have come off their highs.
· The kiwi and the Cad remain weak, while the Aussie has managed to claw back some gains.
· NZDUSD: This has been the biggest mover of the day, it is running into some strong support at 0.7620, and it is starting to look oversold on a daily basis according to the RSI and MACD.
· AUDNZD is running into resistance at 1.2750, just below the 100-day moving average at 1.2770; it looks oversold on a short-term basis. Above here sees to 1.2800.

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Best Regards,

Kathleen Brooks| Research Director UK EMEA | FOREX.com

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