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Markets are sceptical about the new Eurozone deal

Markets are sceptical about the new Eurozone deal

Market scepticism over the Friday deal for a eurozone fiscal compact has seen equity markets open lower in Europe. The current confusion is how the ESM and EFSF will co-exist and whether European governments will be able to find the €200 billion that needs to be given to the IMF to increase its own resources. While direct central bank funding to the IMF appears to have been ruled-out, it seems that central banks can create SDRs in the IMF’s general account.

Weekend press reports highlight the risk to France’s AAA credit rating and a general downgrade of eurozone member states remains distinctly possible. Even German is rumoured not to be immune from a downgrade should ratings agencies decide that the level of financial support for eurozone member states has increased.

The euro slipped to $1.33 against the dollar as is struggling in light of the ECB’s decision not to start large scale purchases of sovereign debt last Thursday. Sterling is also lower, with cable falling from $1.5650 to $1.55 after the London open. Euro-sterling managed to rally above £0.8550 before finding support at £0.8540. Foreign exchange markets are concerned that the coalition government is now vulnerable following criticisms of PM Cameron from Deputy PM Clegg over the weekend. A host of Lib Dem ministers have insisted that they remain committed to the Coalition for now, which should help steady the pound this morning, but the dearth of economic data today will leave it struggling for direction.

PM Cameron is due to give a statement to the House of Commons this afternoon on the Brussels Summit and there will be some focus on how united the government seems.

The fall in equity markets has seen bonds rally and the 10-year gilt yield is now back at 2.12%. Italian 10-year yields are higher, but have so far remained below 6.5% despite a great deal of speculation that we could see a retest of 7% given the ECB’s reluctance to purchase sovereign debt. We expect to see some limited purchases to help to control government bond yields.

The US monthly budget statement for November is the only release of note this afternoon. The market is looking for a $140 billion deficit, which would mark a $10 billion narrowing from last year.

Oil prices dipped in Asia as markets remained cautious. The front WTI contract fell by 18¢ per barrel to $99.23, while the front Brent Crude contract fell by 16¢ to $108.46. Prices are expected to continue to ease back, but Brent prices look to remain well supported at $105 for now.

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