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Latest economic figures strengthen the EURO

Latest economic figures strengthen the EURO

The Merkel-Sarkozy weekend summit finished with both leaders promising ‘lasting, global and quick responses before the end of the month’. As ever, no concrete details were announced, but it seems that the plan will concentrate on recapitalising banks. Hopes for a comprehensive plan would increase if the Slovakian government passes the bill to enlarge and extend the EFSF tomorrow. That then leaves the G20 Finance Ministers meeting in Paris on 14th to hammer out a final deal. Pressure has been piled on eurozone leaders to come out with a comprehensive plan in recent days. UK PM Cameron told the FT that there was perhaps just weeks to avert disaster in the eurozone and we have seen similar comments from the Whitehouse.

European stock markets rallied this morning, on hopes that any recapitalisation would not lead to a large dilution of existing shareholders. But, with US markets closed for the Columbus Day holiday, there may be little follow through this afternoon. Indeed, given the mood swings exhibited by financial markets in recent weeks we could possibly see a reversal in sentiment by mid-morning, especially in light of the lack of hard economic data today. The eurozone Sentix Investor Confidence index for October should provide a reasonable guide as to how things are faring.

The single currency found some support early this morning as economic data proved stronger than expected. Euro-sterling rallied from 86p to £0.8650 in early trading, while euro-dollar rose from $1.3350 to $1.35.

The German trade balance unexpectedly widened in August from and upwardly revised €10.5 billion in July to €11.8 billion. The market had looked for a €9 billion outturn, so this leaves net trade on track to remain flat in the third quarter so supporting Q3 GDP growth.

French manufacturing production was also surprisingly strong in August given the PMI manufacturing readings. Production rose by 0.7% in August against expectations for a 0.2% increase. July data were revised upwards to show a 1.8% increase in the month so production has now risen by over 2% in the first two months of the third quarter, against a 0.4% fall in Q2. Industrial production rose by 0.5% after a 1.8% increase in July. The rise smashed expectations of a 0.7% fall and again points to a solid growth outturn. Looking forward, business confidence has softened a little, with the Banque de France’s index falling from 97.02 to 96.76. This remains significantly below the 109.9 peak seen in January.

But given concerns over the pace of growth in the eurozone and the prospect for a return to recession, the French and German outturns are a reminder that activity in the two largest economies in the single currency area is still holding up well and that Germany remains on track to grow by 3.0% this year.

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