There is plenty to digest as we end Q3. Not only do four Spanish savings banks need to be re-capitalised with state aid to the tune of EUR 7.5bn, but added to that the Troika have had to delay their meeting on Greece because the Greek Finance Ministry has been taken over by protestors, Athens is holding an emergency cabinet meeting on Sunday and the cost to insure Chinese government debt against default have risen to its highest level since March 2009.

The economic slowdown in China is threatening to drag the Asian powerhouse into the sovereign fray. Its 5-year CDS has widened by 20 basis points in the past week. Although the HSBC manufacturing PMI for September came in better than expected, at 49.9 it remains below the crucial 50 level that separates expansion from contraction. Some analysts have significantly revised down their growth expectations for China, which is starting to spook investors. Anything below 7.7% is considered stall speed. Even though the economy expanded by a healthy 9.5% in the second quarter, the risk is that global growth slows, hurting trade and weighing on China's exports. If growth slows this impacts China's credit-worthiness even if the economy is still flush with FX reserves.

But the Chinese government still has options, something the economies in the West lack, so it could embark on a massive stimulus programme akin to 2008/09 to try and boost domestic demand. Right now it seems to be engaged in finding ways to support Europe - through buying government debt etc. - perhaps turning inwards would reap more economic benefits.

China might be grabbing the spotlight today, but Europe is never far from some catastrophe or other. The Austrian Parliamentary vote on the EFSF was temporarily disrupted due to heckling, the Troika meeting in Greece was disrupted by protestors and 4 Spanish banks have been nationalised.

After today's deadline to re-capitalise, the Bank of Spain announced that the national bank rescue fund will own majority stakes in four caja savings banks. Already the head of other troubled lender CAM has become embroiled in a scandal over her rewards package, and the Bank of Spain governor said that the cost to bailout CAM may fall on the taxpayer as losses may be more than originally expected. The euro has sold off during the announcement and is now below support at 1.3490/95.

Investors may be put off holding euro over the weekend due to a large amount of event risk. The Greek cabinet is meeting to discuss labour reforms, a draft 2012 budget proposal and changes to the medium-term fiscal plan. As we have experienced before, anything can happen during these weekend meetings, so expect the unexpected. Any delay or stalling over these much-needed reforms could cause another bout of market volatility. A Eurogroup meeting of finance ministers on Monday is also laden with event risk. We should find out if the finance ministers are in union over how to solve the debt crisis and extend the EFSF to EUR2-3 trillion as suggested by the G20, which will be important for market sentiment in the short to medium-term.

The ECB meeting on Thursday was always important, but it has taken on even more significance for forex investors after the CPI estimate for September jumped to its highest level for three years. CPI came in at 3%, up from 2.5% in August. This makes a rate hike less likely, especially since there is an important hawkish faction in the ECB, who have warned about inflation pressures. Thus we expect Trichet, at his last meeting as President, to sound slightly more hawkish than some may expect. This is mildly euro positive in the long-term. Right now the euro is falling along with stocks, with European indices down approx. 2% so far today. Unemployment in the currency bloc remained steady at 10% on the month, while German retail sales fell 2.2% between July and August.

Stocks are lower while the yen and the dollar have risen. Ahead today US PCE, University of Michigan Confidence data and the Chicago Purchasing Managers index will distract the market. But it could be a quiet, range-bound afternoon as traders wait out what has been a very long, exciting and painful for some third quarter.

Data Watch:
12.00BST (0700 ET) SW Riksbank General council meeting
13.30BST (0830 ET) US Personal Income Last 0.3 Exp 0.1
13.30BST (0830 ET) US Personal Spending Last 0.8 Exp 0.3
13.30BST (0830 ET) US PCE Last 0.4 M/M 2.8 Y/Y Exp 0.3 M/M 2.5 Y/Y
13.30BST (0830 ET) US PCE CORE Last 0.2 M/M 1.6 Y/Y Exp 0.3 M/M 1.3 Y/Y
14.45BST (0945 ET) US Chicago PMI Last 56.5 Exp 55.0
14.55BST (0955 ET) US Michigan Consumer sentiment Last 57.8 Exp 56.3
16.00BST (1100 ET) US Bullard (FOMC NON Voter) Speaking

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Kathleen Brooks| Research Director UK EMEA |

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