Interesting week.
Courtesy of Mr.Bernanke we learn that 7 Fed governors are against rate rises before end 2014 / start 2015.That's a full 7 years after the start of the crisis. Yes , 7 years. More than a bit like Japans lost decade. Have to wonder what it is that the FOMC sees happening that requires rates to stay on hold for another 3 or 4 years ? Clearly they aren't forecasting a rebound in the €, muscular US jobs growth, or a decoupling of the US economy. Perhaps they're just trying to scare us and underneath it all they're more hawkish ?
Germany suggests that because of non-compliance a European Budget Commissioner should oversee Greek government spending . Athens huffily says ' thank you but no thanks '. It wants to retain its sovereignity regarding taxation and expenditure . This morning an announcement from Berlin that Frau Merkel will be actively campaigning for the re-election of France's President Sarkozy . She'll be seen " standing alongside him " . Quite how the Greek or French electorates will view this Germanization of their domestic political sphere remains to be seen. Reinforces my view that the real € crisis comes when the southern euroland states vote in 2013/2014. Of course the crisis could come earlier if Madame Merkels intervention fails to swing the election in favour of Monsieur Sarkozy . Mr.Hollande the Socialist candidate is already talking about renegotiating the treaty agreed at the last summit in December.
Interesting meetings in Switzerland earlier this week. Return with the feeling that politicians are still scrambling to catch up with the crisis. There is a danger in this. Social media is behind an attack on banks and bankers for having got us into this mess. Politicians are happy to leap on the bandwagon . '' It wasn't my fault " always an attractive position for the political class to take. But without the credit creation that banks provide where exactly would we be ? Where will we be as banks massively deleverage ? . Some hard socioeconomic questions will be coming our way soon . This week we learnt that Spanish unemployment is at 23% and rising ! Even more alarming , Spanish youth unemployment is at an astounding 50 %. Desperation levels.
The recent rally has started to run out of steam. 2011 earnings released over the last week or so are hinting that corporate margins are under pressure . Wall Streets brightest are waking up to the fact that growth is slowing, unemployment rising, and volatility is here to stay.On the positive side Armageddon has failed to take place and probably won't until 2014. November and Decembers market wide psychological depression has been replaced by a more measured tone. With the super cycle over governments will be forced into setting priorities within budgetary limits. This is a concept that is quite alien to any of the current batch of elected leaders. Reality will probably strike after the US election. Until then gold remains attractive on dips below $1700 and equities , despite an imminent golden cross, on a retracement towards 1280 on the S&P. Gilts remain the place to be .
Protectionism is the beast that could kill equities. There are signs that it's stirring in the runup to the US Presidential race. Time for a bout of China bashing ?.
Sunday, January 29, 2012
Saturday, January 14, 2012
National parochialism.
No surprises . The S&P downgrade of the credit ratings of France and other Eurozone countries has finally come through . On the positive side it wasn't as bad as it might have been . France was only cut by one notch, not the two that some observers had thought possible. S&P takes the view that the policy measures taken so far to address the crisis remain insufficient . Put more succinctly Europes politicians have been unable to rise to the challenges facing them. Parochialism rules.
Markets are unlikely to be unsettled by the S&P decision. More importantly, they will now be determining whether Moodys and Fitch will follow suit. We would expect Moodys to join their colleagues at S&P with a raft of downgrades possibly at the start of Q2. ( They have said they will review their rating of France at the end of Q1 ).A second rating downgrade may lead to institutional selling flows out of France and into the remaining triple A's. A textbook flight to quality . It would have been much easier for France and Italy if Germany had also been downgraded. Then the whole AAA benchmark would have been rendered moot. Once forced selling begins a second downgrade of France is possible as money flows from there into Germany. This is when the trouble starts.
Over the next month the key implications of this widely heralded move are likely to be political. Trying to get anyhting meaningful agreed in Europe ahead of the French Presidential elections has suddenly become much more difficult.Yet without political help for Spain and Italy the chances of the current techocratic government surviving decreases. By the same standards the chances for the election of populist governments increases. Hungary may be the tenplate of what lies in store for much of Europe.
1) The UK
Any remaining hope that Britain might sign up to the Europact agreed at the December summit has evaporated . The perception has grown amongst the British public that the Eurozone experiment has failed. A parliamentary majority for further harmonization is unlikely if not downright impossible. A Europe of 26 + 1 is now a de facto certainty. In the near term Sterling and gilts may continue to perform well. By mid year markets may begin to look at the falling value of the European collateral that the UK banks hold against their $2 trillion + of debt. Expect UK rates to be at a 3% level by year end.
2) France
The embarassment for the French government of losing their triple A rating while Germany and Britain retain theirs is tangible. The French government is now under strong pressure to give up more of its fiscal sovereignity and impose tighter austerity. This is something it has been loathe to do. President Sarkozy must now, quickly, decide whether to implement additional fiscal reforms or hang tough with the markets. Imposing spending cuts before an election is something he is against. Fighting the markets is something he cannot win. French banks are already set fo further downgrades, a process that can only sharpen if Greece were to default. Expect further Germanization of French policy.
The danger is that in the run-up to the May Presidential election , calls for France to leave the Euro or to renegotiate the European rescue accord are likely to grow. Things for France can only get worse. Germanys economic dominance of Europe is plain to the French electorate. France speaks of parity with its colleagues across the Rhine. The reality is clear.
3) Germany and Greece
Within Germany support for the Euro is showing the first tangible signs of waning. There are those within Chancellor Merkels own party who take the view that a Greek exit could be managed. We would expect a little more time to be bought for Greece at this weeks Troika negotiations. However, with an economy that has declined in size by 15% since 2008 the chances of repaying its debts become ever more distant and illusory. The real question is whether Greece can stay in the Euro while simultaneously defaulting . Removal of German political and funding support makes default more probable.This is something that we thought unlikely as recently as the start of the year.
4) Italy and Spain
It is only a matter of time before the austerity imposed on Greece, and soon to impact Italy, Spain and Portugal, causes popular resentment . Further election box driven changes to governments within the Eurozone will keep this crisis protracted.Germany seems to have decided that it wants its Eurozone partners to sign up to a radical fiscal pact . This discipline must be enshrined in the forthcoming treaty and only when the ink is dry will more radical solutions ( ie unlimited ECB bond buying ) be considered . Short term this may work . In the mid to longer term it is building up resentment and nationalism.
Conclusion
The European recession is now underway . Watch out for slowing economic output, downgrades by Moodys,further devaluation of the € ( a trading range of 1.15-1.20 to the $ seems reasonable ) and further pressure on the markets. At some stage, following a Moodys downgrade of France , Germany may decide to pull the plug on Greece and try to weather the resulting storm . Portugal would be next in line for a downgrade. Then ?. Sad, because none of this need ever have happened . And Americans think their politicians are bad .
Barring a political accident the probability is that by early next year the ECB will be forced into firing up the printing presses. As early as next week they may provide a further $700 billion of LTRO liquidity to the banking sector . If I'm right H1 2012 will be disinflationary and the latter part of H2 reflationary. That's when gold powers back through to the $2000 level and the S&P touches 1350 .In the meantime this drama will play and play and play . I'm still of the opinion that the crisis will come not in 2012 but in 2013 when austerity measures really take hold in Spain and Italy and when the new French administration understands the nature of the cuts it will have to employ. After the technocrats the populists.
Markets are unlikely to be unsettled by the S&P decision. More importantly, they will now be determining whether Moodys and Fitch will follow suit. We would expect Moodys to join their colleagues at S&P with a raft of downgrades possibly at the start of Q2. ( They have said they will review their rating of France at the end of Q1 ).A second rating downgrade may lead to institutional selling flows out of France and into the remaining triple A's. A textbook flight to quality . It would have been much easier for France and Italy if Germany had also been downgraded. Then the whole AAA benchmark would have been rendered moot. Once forced selling begins a second downgrade of France is possible as money flows from there into Germany. This is when the trouble starts.
Over the next month the key implications of this widely heralded move are likely to be political. Trying to get anyhting meaningful agreed in Europe ahead of the French Presidential elections has suddenly become much more difficult.Yet without political help for Spain and Italy the chances of the current techocratic government surviving decreases. By the same standards the chances for the election of populist governments increases. Hungary may be the tenplate of what lies in store for much of Europe.
1) The UK
Any remaining hope that Britain might sign up to the Europact agreed at the December summit has evaporated . The perception has grown amongst the British public that the Eurozone experiment has failed. A parliamentary majority for further harmonization is unlikely if not downright impossible. A Europe of 26 + 1 is now a de facto certainty. In the near term Sterling and gilts may continue to perform well. By mid year markets may begin to look at the falling value of the European collateral that the UK banks hold against their $2 trillion + of debt. Expect UK rates to be at a 3% level by year end.
2) France
The embarassment for the French government of losing their triple A rating while Germany and Britain retain theirs is tangible. The French government is now under strong pressure to give up more of its fiscal sovereignity and impose tighter austerity. This is something it has been loathe to do. President Sarkozy must now, quickly, decide whether to implement additional fiscal reforms or hang tough with the markets. Imposing spending cuts before an election is something he is against. Fighting the markets is something he cannot win. French banks are already set fo further downgrades, a process that can only sharpen if Greece were to default. Expect further Germanization of French policy.
The danger is that in the run-up to the May Presidential election , calls for France to leave the Euro or to renegotiate the European rescue accord are likely to grow. Things for France can only get worse. Germanys economic dominance of Europe is plain to the French electorate. France speaks of parity with its colleagues across the Rhine. The reality is clear.
3) Germany and Greece
Within Germany support for the Euro is showing the first tangible signs of waning. There are those within Chancellor Merkels own party who take the view that a Greek exit could be managed. We would expect a little more time to be bought for Greece at this weeks Troika negotiations. However, with an economy that has declined in size by 15% since 2008 the chances of repaying its debts become ever more distant and illusory. The real question is whether Greece can stay in the Euro while simultaneously defaulting . Removal of German political and funding support makes default more probable.This is something that we thought unlikely as recently as the start of the year.
4) Italy and Spain
It is only a matter of time before the austerity imposed on Greece, and soon to impact Italy, Spain and Portugal, causes popular resentment . Further election box driven changes to governments within the Eurozone will keep this crisis protracted.Germany seems to have decided that it wants its Eurozone partners to sign up to a radical fiscal pact . This discipline must be enshrined in the forthcoming treaty and only when the ink is dry will more radical solutions ( ie unlimited ECB bond buying ) be considered . Short term this may work . In the mid to longer term it is building up resentment and nationalism.
Conclusion
The European recession is now underway . Watch out for slowing economic output, downgrades by Moodys,further devaluation of the € ( a trading range of 1.15-1.20 to the $ seems reasonable ) and further pressure on the markets. At some stage, following a Moodys downgrade of France , Germany may decide to pull the plug on Greece and try to weather the resulting storm . Portugal would be next in line for a downgrade. Then ?. Sad, because none of this need ever have happened . And Americans think their politicians are bad .
Barring a political accident the probability is that by early next year the ECB will be forced into firing up the printing presses. As early as next week they may provide a further $700 billion of LTRO liquidity to the banking sector . If I'm right H1 2012 will be disinflationary and the latter part of H2 reflationary. That's when gold powers back through to the $2000 level and the S&P touches 1350 .In the meantime this drama will play and play and play . I'm still of the opinion that the crisis will come not in 2012 but in 2013 when austerity measures really take hold in Spain and Italy and when the new French administration understands the nature of the cuts it will have to employ. After the technocrats the populists.
Saturday, December 31, 2011
2012
Recession, unemployment and austerity . It's unlikely to be a great year but also unlikely to be the Armageddon that many commentators are forecasting.
The key question :
Dominating the performance of all markets and all asset classes is the question of whether the Euro can survive .My view ? The effect of a breakup would be so devastating that the common currency will probably hold together for the coming year. Some of the big investment banks are talking about a 25% drop in Euroland GDP if there were to be a disorderly divorce. This seems improbable. More likely would be a steep - 3-5%- fall in output, followed by a decade of zero growth and growing social unrest as unemployment levels rise to the mid teen.
To avoid this governments will engineer a fall in the €'s value relative to most other major currencies by lowering interest rates. This will help maintain jobs, boost Euroland competitiveness , and ease the agony of disinflation as austerity measures take hold in Spain and Italy. A mishmash of ECB bank funding and IMF loans will help dull some of the economic pain in Portugal, Ireland and Greece. This combination of factors paves the way for higher, imported, inflation in France and Germany from 2013 onwards. Imperfect but at least a workable solution. Greece, which is now effectively dysfunctional at the economic level, may see a structured default and a temporary suspension from full Euroland obligations in order to keep a lid on social discontent. A full exit by Athens remains unlikely.
The major threat to this difficult scenario will come from France. The possibility that Francois Hollande, the Socialist candidate and possible victor in the May 2012 Presidential elections, will seek to water down the austerity measures could lead to a crisis in Franco-German relations . Markets would not respond well to this perceived back-tracking . The French triple A rating would certainly go and French bank shares might need government help in recapitalizing . On the downside , there's a 1 in 5 chance that things could move out of the politicians control with French ratings seriously weakened an Italian and Spanish debt refinancings becoming untenable.
The real pressure on Euro cohesion comes in 2013 when the Italian and Spanish electorates feel the full brunt of austerity with no end in sight and before the ECB printing presses are rolling at full tilt.
Bottom line . Expect the Euro to survive in 2012 but with extreme turbulence across all asset classes as the French Presidential election and its unguarded rhetoric unfold. Market volatility , particularly in the continental banking sector, may start as soon as the new trading year .
To follow later this week. The succession issues in Russia, the US, and Saudi Arabia. Why gold is weak. Oil as an insurance policy .
The key question :
Dominating the performance of all markets and all asset classes is the question of whether the Euro can survive .My view ? The effect of a breakup would be so devastating that the common currency will probably hold together for the coming year. Some of the big investment banks are talking about a 25% drop in Euroland GDP if there were to be a disorderly divorce. This seems improbable. More likely would be a steep - 3-5%- fall in output, followed by a decade of zero growth and growing social unrest as unemployment levels rise to the mid teen.
To avoid this governments will engineer a fall in the €'s value relative to most other major currencies by lowering interest rates. This will help maintain jobs, boost Euroland competitiveness , and ease the agony of disinflation as austerity measures take hold in Spain and Italy. A mishmash of ECB bank funding and IMF loans will help dull some of the economic pain in Portugal, Ireland and Greece. This combination of factors paves the way for higher, imported, inflation in France and Germany from 2013 onwards. Imperfect but at least a workable solution. Greece, which is now effectively dysfunctional at the economic level, may see a structured default and a temporary suspension from full Euroland obligations in order to keep a lid on social discontent. A full exit by Athens remains unlikely.
The major threat to this difficult scenario will come from France. The possibility that Francois Hollande, the Socialist candidate and possible victor in the May 2012 Presidential elections, will seek to water down the austerity measures could lead to a crisis in Franco-German relations . Markets would not respond well to this perceived back-tracking . The French triple A rating would certainly go and French bank shares might need government help in recapitalizing . On the downside , there's a 1 in 5 chance that things could move out of the politicians control with French ratings seriously weakened an Italian and Spanish debt refinancings becoming untenable.
The real pressure on Euro cohesion comes in 2013 when the Italian and Spanish electorates feel the full brunt of austerity with no end in sight and before the ECB printing presses are rolling at full tilt.
Bottom line . Expect the Euro to survive in 2012 but with extreme turbulence across all asset classes as the French Presidential election and its unguarded rhetoric unfold. Market volatility , particularly in the continental banking sector, may start as soon as the new trading year .
To follow later this week. The succession issues in Russia, the US, and Saudi Arabia. Why gold is weak. Oil as an insurance policy .
Wednesday, December 14, 2011
The world turning ?
Strange market action . Gold and the Euro down sharply as institutions sell anything to raise cash . Seems as if Europe, evaporating interbank lending, and eye watering funding stresses have all been forgotten. So passe , so 2011.
Yesterdays price action across asset classes seems to be saying that H1 2012 will all be about falling Chinese demand, fiscal restraint,a global growth slowdown, and commodity excoriation .Guess that means we're in a recession .
Look out for a $/€ exchange rate at 1.20 by mid-Q1. Great for tourism, German exports, and mediterranean farmers. Inflation is needed as part of a plan to prevent a €land meltdown.
Yesterdays price action across asset classes seems to be saying that H1 2012 will all be about falling Chinese demand, fiscal restraint,a global growth slowdown, and commodity excoriation .Guess that means we're in a recession .
Look out for a $/€ exchange rate at 1.20 by mid-Q1. Great for tourism, German exports, and mediterranean farmers. Inflation is needed as part of a plan to prevent a €land meltdown.
Tuesday, December 13, 2011
Fact of the week
Eurozone exports in €bn H1 2011 to :
China : € 186.9
US : € 115.7
UK : € 187.4
Britain remains the biggest export market for the 17 countries in the Eurozone . Britain also runs a trade deficit of €72 bn with the € area.
China : € 186.9
US : € 115.7
UK : € 187.4
Britain remains the biggest export market for the 17 countries in the Eurozone . Britain also runs a trade deficit of €72 bn with the € area.
Friday, December 9, 2011
Less to this than meets the eye .
What a peculiar summit .
The British hoped that in return for backing a new fiscal treaty Germanys Chancellor Merkel would allow ' opt outs ' for Londons financial markets . Prime Minister Cameron wanted UK banks to have capital requirements higher than the proposed EU legislation would allow . He was ill advised . Germany backed France . Already on the hook for a €100 bn refinancing programme , neither Germany nor France want to stump up the cash to recapitalize their banks to UK standards. In addition neither of them is keen to have the Eurozones main financial centre and its huge tax revenues remain ' offshore' in London .
The French President took delight in saying the British demands were ' unacceptable ' . This default position will go down well at home and substantially boost his re-election chances . The fact that this has nothing to do with the problem at hand is neither here no there . In the absence of any willingness by its partners to horse trade the UK has therefore been politically outmanouevered and now finds itself in spendid isolation . French diplomacy 1, British diplomacy 0.
For the UK this situation is both unintended and unpredictable. The likelihood of a UK referendum on membership has just risen . Withdrawal no longer seems improbable . The effect of UK referendum on continued membership may lead to similar calls in Ireland, Finland , Greece and the Netherlands . Secretly some smaller European countries actually quite like having the British around as a counterweight to Berlin and Paris .
In the short term France is the big winner . British influence within core euroland has evaporated . The natural beneficiary is Paris which can now claim that it, together with Berlin , is the twin centre of European decision making. Smaller European countries may bristle at French bullying but have fallen in line . President Sarkozy's plans for re-election have been boosted and protectionism , Paris style, is once again on the front burner .
Germany has got what it wanted . Tighter political and fiscal union . All those profligate southern Europeans will have to save more and spend less. Berlin has also become the de facto European superpower and much of Euroland faces a decade, possibly two, of enforced austerity as it adjusts to teutonic rigour . Sound money but at what cost ?
So much for the politics but what about plans to save the €uro ? There may be enough in the promise of a treaty enshrined balanced budget 'golden rule ' to allow the European Central Bank to enter the market to buy Spanish and Italian bonds in size. There may also be enough willingness for the IMF to step in and lend a €200 billion helping hand to the Stabilization Fund. However , the agreements so far fall remarkably shy of the ' big bazooka ' that markets were hoping for. The question of paying down debt to the 60% level enshrined in the proposed new treaty will also require attention . For Italy this means not only an austerity package but the laying off of $850 billion of debt. Spread over 20 years that's a deflationary impact of about $50 billion a year .
Cynics must wonder what the impact of this austerity will have on the Italian political landscaope in two years time . What an EU without a strong free trade, open market proponent like the UK will look like is a question for another day . A treaty calling for fiscal austerity that is imposed without democratic legitimacy might also cause problems down the road .France is hoping that Germany relents in its pursuit of monetary rigour. The can has just been kicked down the road again .
Markets are likely to take their time to digest the outcome of the summit . The feel good factor at work at the end of the year may still drive equities higher . However, come the New Year investors will be looking for action not signals . The news headlines have focused on British exclusion . The real story is the lack of substance in addressing the Euro crisis and the danger of French style protectionism . The dollar looks more and more attractive .
The British hoped that in return for backing a new fiscal treaty Germanys Chancellor Merkel would allow ' opt outs ' for Londons financial markets . Prime Minister Cameron wanted UK banks to have capital requirements higher than the proposed EU legislation would allow . He was ill advised . Germany backed France . Already on the hook for a €100 bn refinancing programme , neither Germany nor France want to stump up the cash to recapitalize their banks to UK standards. In addition neither of them is keen to have the Eurozones main financial centre and its huge tax revenues remain ' offshore' in London .
The French President took delight in saying the British demands were ' unacceptable ' . This default position will go down well at home and substantially boost his re-election chances . The fact that this has nothing to do with the problem at hand is neither here no there . In the absence of any willingness by its partners to horse trade the UK has therefore been politically outmanouevered and now finds itself in spendid isolation . French diplomacy 1, British diplomacy 0.
For the UK this situation is both unintended and unpredictable. The likelihood of a UK referendum on membership has just risen . Withdrawal no longer seems improbable . The effect of UK referendum on continued membership may lead to similar calls in Ireland, Finland , Greece and the Netherlands . Secretly some smaller European countries actually quite like having the British around as a counterweight to Berlin and Paris .
In the short term France is the big winner . British influence within core euroland has evaporated . The natural beneficiary is Paris which can now claim that it, together with Berlin , is the twin centre of European decision making. Smaller European countries may bristle at French bullying but have fallen in line . President Sarkozy's plans for re-election have been boosted and protectionism , Paris style, is once again on the front burner .
Germany has got what it wanted . Tighter political and fiscal union . All those profligate southern Europeans will have to save more and spend less. Berlin has also become the de facto European superpower and much of Euroland faces a decade, possibly two, of enforced austerity as it adjusts to teutonic rigour . Sound money but at what cost ?
So much for the politics but what about plans to save the €uro ? There may be enough in the promise of a treaty enshrined balanced budget 'golden rule ' to allow the European Central Bank to enter the market to buy Spanish and Italian bonds in size. There may also be enough willingness for the IMF to step in and lend a €200 billion helping hand to the Stabilization Fund. However , the agreements so far fall remarkably shy of the ' big bazooka ' that markets were hoping for. The question of paying down debt to the 60% level enshrined in the proposed new treaty will also require attention . For Italy this means not only an austerity package but the laying off of $850 billion of debt. Spread over 20 years that's a deflationary impact of about $50 billion a year .
Cynics must wonder what the impact of this austerity will have on the Italian political landscaope in two years time . What an EU without a strong free trade, open market proponent like the UK will look like is a question for another day . A treaty calling for fiscal austerity that is imposed without democratic legitimacy might also cause problems down the road .France is hoping that Germany relents in its pursuit of monetary rigour. The can has just been kicked down the road again .
Markets are likely to take their time to digest the outcome of the summit . The feel good factor at work at the end of the year may still drive equities higher . However, come the New Year investors will be looking for action not signals . The news headlines have focused on British exclusion . The real story is the lack of substance in addressing the Euro crisis and the danger of French style protectionism . The dollar looks more and more attractive .
Sunday, November 27, 2011
Things to watch out for this week.
Ludicrous as it may seem the possibility of a Eurozone break-up has risen sharply. Italian yields at 8% and Spanish yields at levels not far behind are quite simply unsustainable. The good news this Sunday evening is that at last the ruling elites in both Berlin and Paris seem to have woken up to how close to chaos we are.
The story going the rounds tonight is that after a series of intra-government meeting overs the weekend President Sarkozy will give a major speech ahead of the next EU summit on December 9th in which he will spell out direct and readily implementable steps to save the €. This will involve support for southern tier bond markets ( overdue ), access to a €580 bn IMF standby line and accelerated fiscal union within the 17.
The markets between now and December 9th can be expected to be turbulent with widespread selling of euro area assets by Asian and North American institutions . The new Belgian government ( also overdue ) is expected to announce a package of cuts totalling €15 bn by the end of next week while pressure is being exerted on Italys PM, Mario Monti , to start spelling out what steps he plans to take. A €20 bn austerity package is the minimum required from Italy.
A Franco-British summit on Friday will pave the way for treaty changes to allow the 17 Euro zone members to forge head .France can be expected to give ground on the proposed Tobin finacial transactions tax in return for promises that Britain will not be obstructive to the treaty changes required for fiscal union and the de facto development of a new inner tier .
Intraday volatility over the next two weeks may be extreme . Are this weekends signals rumour or reality ? If action doesn't follow along by the time of the EU summit then the markets reaction is likely to be brutal. The soluble is close to becoming insoluble .
The story going the rounds tonight is that after a series of intra-government meeting overs the weekend President Sarkozy will give a major speech ahead of the next EU summit on December 9th in which he will spell out direct and readily implementable steps to save the €. This will involve support for southern tier bond markets ( overdue ), access to a €580 bn IMF standby line and accelerated fiscal union within the 17.
The markets between now and December 9th can be expected to be turbulent with widespread selling of euro area assets by Asian and North American institutions . The new Belgian government ( also overdue ) is expected to announce a package of cuts totalling €15 bn by the end of next week while pressure is being exerted on Italys PM, Mario Monti , to start spelling out what steps he plans to take. A €20 bn austerity package is the minimum required from Italy.
A Franco-British summit on Friday will pave the way for treaty changes to allow the 17 Euro zone members to forge head .France can be expected to give ground on the proposed Tobin finacial transactions tax in return for promises that Britain will not be obstructive to the treaty changes required for fiscal union and the de facto development of a new inner tier .
Intraday volatility over the next two weeks may be extreme . Are this weekends signals rumour or reality ? If action doesn't follow along by the time of the EU summit then the markets reaction is likely to be brutal. The soluble is close to becoming insoluble .
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