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UK Chancellor George Osborne could not have better timing - as he was stepping onto the podium to start his party conference speech in Manchester rating agency S&P affirmed the UK's credit rating. The UK is one of only ten countries in the world who still has a triple A rating with a stable outlook, and it has even hung onto it as the US lost its top credit rating earlier in the summer.

Other news from the S&P wasn't as positive, it expects growth rates to be around 1.8% on average between 2011-2014, which suggests the UK is in for a long period of slow growth, which could limit corporate profits and keep stock markets subdued for some time. The lacklustre expectations for growth from the UK economy kept the pound subdued and took the shine off the news about the UK's credit rating.

Back to Osborne's speech - after some Brown-bashing he affirmed his commitment to his fiscal austerity plans saying you can't borrow your way out of a debt crisis that was welcomed with a rousing round of applause from the Tory faithful. He also said he would help the Bank of England keep interest rates at record low levels, the only way to ease the pain of fiscal austerity, he said. How we can help the independent BOE, I don't know, but it adds to evidence the BOE may take action, perhaps as early as this week. The prospect of a dovish BOE is priced into the pound already so Osborne's low rates comments actually saw GBPUSD test the air above 1.5520.

It may be the start of a new quarter, but the markets have the same gloomy outlook they had at the end of Q3. Stocks are lower by 2-3 per cent this morning, following some sharp moves in Asian markets overnight. The driver of the sell-off was news that although Greece 's cabinet had agreed on a plan for the 2012 budget, it would miss its deficit reduction targets for this year with the deficit only narrowing to 8.5% of GDP instead of the 7.6% target set by the EU/ECB and IMF. Added to this, news that rating agency Moody's had put Franco/ Belgian bank Dexia on review for a downgrade also spooked the markets, which were led lower by Europe's banking sector. Moody's said that the review was necessary because of the trouble Dexia is having with attracting financing in the wholesale markets. This is a global problem right now as the inter-bank lending market dries up fuelling fears of a 2008 style credit crunch.

The banks were dealt another blow when reports surfaced that the EU was considering increasing haircuts on private sector Greek bond holders to 75% from 20% agreed in July. This is only adding to the pressure on banks' balance sheets especially French banks. Interestingly, banks in Australia and China have seen their share prices fall and the cost to insure their debt against default soar in the past month. Australia is also reliant on inter-bank funding and due to the inter-connectedness of the financial markets if there are stresses in Europe this impacts access to funding for banks the other side of the world. Chinese banks are also at risk of a global slowdown as it may reduce demand for domestic lending; added to this reports last week suggest that bad loan rates in China have risen sharply.

The banking sector is a major worry for investors right now, so is global growth. PMI data for Europe last month was a touch weaker than the flash forecast estimated. It came in at 48.5 vs. 48.4 - the lowest level since August 2009. PMI's are a great bell-weather for the overall health of the economy, so data in Europe does not look good and is unlikely to lift pressure on the euro right now. The single currency sold off to 1.3310 this morning, the lowest level since January. It has found its feet during the European session and 1.3350 is acting as resistance, but in the absence of a solution to the Greek debt crisis and expectations of a dovish ECB on Thursday is likely to keep the overall direction of the euro south. Ecb'S Nowotny hinted that the Bank may extend its bond buying programme and the long-term liquidity available for banks, which we think is more likely than a rate cut at this stage. He added that the bond-buying programme was not QE, which helped the euro find its footing.

There was a growth surprise for the UK. Its manufacturing PMI for September was much stronger than expected at 51.1 vs. expectations of 48.5. This suggests that there is moderate growth in the sector, which could help the UK economy avoid a double-dip. The US ISM released later today will also tell us how close the US economy is to contraction. The market expects a decline from 50.6 to 50.3, which is growth - but only at very low levels.

The Ecofin meeting that takes place at 1700BST/ 1200 ET will be key for market direction this week. There are two things to look out for: firstly whether Europe's finance ministers will support leveraging the EFSF to increase its firepower (or make it the world's largest CDO...) and 2, when Greece will receive its next tranche of bailout funds. We don't expect much traction on the former, but regarding the latter we could see the Ecofin only agree to release the 6th tranche of bailout funds once the Greek Parliament passes the 2012 budget plan. So there is plenty of event risk for the euro in the coming days.

Data Watch:


EU Euro group meeting

EU Greece 2012 Draft budget submitted to Parliaments & TROIKA finishes its 5th review

15.00BSAT (1000 ET) US Construction spending Last -1.3 Exp -0.1

15.00BST (1000 ET) US ISM Manufacturing Last 50.6 Exp 50.3

21.00BST (1600 ET) US Vehicle Sales Last 12.1 Exp 12.8

23.00BST (1800 ET) US Lacker (FOMC Non Voter speaking)

04.30BST (2330 ET) AU RBA Cast target rate Last 4.75 Exp 4.75

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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