World First Morning Update 25th October 2011: European numbers point to further slowing, probable rate cuts

Pressure mounted further on the powers that be in the Eurozone yesterday as the clock ticks us closer to yet another D-Day. Manufacturing and services numbers from Germany, France and the wider European economy showed yesterday that the region is slipping further towards a secondary recession. While a fiscal plan is being dreamt up in some back room in Brussels at the moment, the next step for monetary policy seems blindingly obvious and a rate cut from the new ECB president Mario Draghi and the remainder of the governing council is now expected come the November meeting.

The euro wobbled on the PMI numbers but the broad moves of the market were positive for risky assets with the dollar losing ground and equities pulling higher. The Asian session however has been quiet with investors still happy to sit on the sidelines and wait for the outcome of tomorrow’s European summit before committing any capital to these markets.

Currencies are gaining against the euro this morning as well ahead of the French consumer confidence number out at 0745. Confidence within the country is set to slip to its lowest since December 2008 although this is not a purely French issue; confidence is near recent lows in almost all developed nations at the moment. Unfortunately the market seems to be apportioning more weight to that of the EU countries more than it does the US or Japan for example.

Germany is at the core of the Eurozone and is the main focus today. Chancellor Merkel is back in Germany to convince lawmakers there that the plan to leverage the EFSF is the way to go. We expect that the votes of the CDU and the CSU together should be enough to encourage passage but headlines from lawmakers opposed to the action will hurt risk later in the day. The debate will take place throughout the day.

Sterling could be in for a tough day as the greatest most recent harbinger of losses for GBP, Mervyn King, is due to speak to a Treasury Select Committee on quantitative easing. Whilst the arguments for QE are well known in the market (dried up business lending, impact of the European slowdown) the fact that the Governor will be verbalising these in front of lawmakers may be cause for concern for those holding sterling in the short term. We do however think that the Bank of England’s more proactive approach to the slowdown in global growth is a net positive for GBP.

The other main announcement is US consumer confidence at 15.00 which is expected at 46.0, up from last month’s number of 45.4. The slight improvement will obviously not be cause for great celebration given the “jobless stagflation” that the US is currently going through. If it is better than expected however we could see risky assets bid into the close of business.

Latest exchange rates at time of writing