The mood in the European equity markets is fairly beak. The Dax has sold off sharply and is down nearly 3 per cent. Likewise, the FTSE is lower by more than 2.5 per cent. Europe's short selling ban on financial stocks doesn't seem to be having the desired effect, possibly because it doesn't include derivatives contracts and also because the market is now focused on the weak outlook for global growth.

There is a general negative tone in the markets right now. In the absence of any new information investors are more comfortable selling. This could weigh on markets for some time as there appears to be no immediate solution to the Eurozone debt crisis and there are growing signs that the UK, US and Europe are on the cusp of recession.

EURUSD is trading in a fairly tight 1.4470-1.4550 range, GBPUSD is even tighter and the high today has been 1.6550 (the resistance level we noted yesterday) and the low 1.6490. Gold is also higher today, and is close to the $1,800 per ounce highs reached on 11 August. Stocks are broadly lower. There have been some interesting developments in the European bond markets. Italian and Spanish bond yields have been falling, but this is in contrast with Portuguese yields, which moved higher this morning. This divergence suggests that the ECB may be actively involved in the market again, but we will have to wait to see the next few weeks' data from the ECB before we know for sure.

The markets have been moving towards a more fundamental focus in recent weeks, and that is likely to ensure a pessimistic tone remains in the markets. There was some weak data out of the UK and Europe today. In the UK retail sales were weaker in July. Sales rose by 0.2%, excluding fuel, the annual rate fell to -0.2%. The outlook for consumption has darkened in recent weeks and yesterday we found out that unemployment had risen in the three months to June to 7.9%. The Bank of England has shifted towards a more dovish stance, however the minutes from its last meeting suggest that QE is not on the table right now, however, if we see a more prolonged deterioration in the data at the same time as the government is embarking on its fiscal consolidation programme then the Bank of England may have to step in to plug the growth gaps.

The Pound is likely to remain range bound for some time, and although GBPUSD may remain supported we believe it could suffer in the long term especially against the Aussie and the Kiwi, which both have better growth and debt dynamics.

Elsewhere, in Europe construction output fell sharply in June, however it has had a muted impact on the single currency. The euro has staged a recovery against the Swiss franc. The Swissie has traded softly today as the resolve of the SNB to weaken its currency starts to get priced in. Although yesterday's intervention measures were considered short of the mark - the SNB didn't announce any plans to intervene directly in the spot FX market or a currency peg or floor to limit Swissie strength - it still has cards left in its hand and more extreme ways to weaken the franc could be waiting in the wings. For today at least the FX market doesn't want to fight the SNB.

Japan's finance minister has also been on the wires today. USDJPY is stuck in a stubborn range but remains at very low levels around 76.50. Finance Minister Noda said that intervention only works if it is a shock, but he reiterated that the Japanese authorities will "take decisive action versus excessive yen moves." Since the yen has remained in a range in recent trading sessions, unless we see a sharp move lower then intervention is unlikely at this stage. But we urge caution when trading the yen crosses.

Ahead today, US CPI data will be in focus. The market expects c ore CPI to rise to 1.7% from 1.6%. We are close to the year anniversary from when Bernanke first touted QE2 at last year's Jackson Hole conference. Speculation is rising that the Fed may announce QE3, however, we believe there is a major hurdle towards more stimuli: inflation. Last year core inflation was running at 0.6% YoY, 12 months later it is closer to the target 2% rate. Thus, today's price data will be looked at to determine if QE3 is in the wings or not.

Data Watch:
Canada 13:30BST (0830 ET) Leading Indicators (Jul) m-o-m n/a 0.20% 0.20%
United States 13:30BST (0830 ET) CPI (Jul) y-o-y 3.3% EXP, 3.6% LAST
United States 13:30BST (0830 ET) CPI Ex Food & Energy (Jul) 1.7% EXP, 1.6% LAST
United States 13:30BST (0830 ET) Initial Jobless Claims (Aug-13) 400K EXP, 395K LAST
United States 13:30BST (0830 ET) Continuing Claims (Aug-6) 3700K EXP, 3688K LAST
United States 13:35BST (0835 ET) Fed's Dudley Speaks
United States 15:00BST (1000 ET) Leading Indicators (Jul) 0.2% EXP, 0.3% LASST
United States 15:00BST (1000 ET) Philadelphia Fed. (Aug) index 2.0 EXP, 3.2 LAST
United States 15:00BST (1000 ET) Existing Home Sales (Jul) 2.7% EXP, -0.8% LAST
United States 19:30BST (1430 ET) Fed's Dudley Speaks

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Kathleen Brooks| Research Director UK EMEA |

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