Investment Research — General Market Conditions

Italy's President Giorgio Napolitano announced in a statement last night that PM Berlusconi will step down once new austerity measures have been approved. This came after the coalition government yesterday only managed to garner 308 votes, which was seven votes short of an absolute majority, see WSJ. The endorsement of new austerity measures are set to take place on 15 November.

Chinese inflation released overnight showed a decrease to 5.5% in October down from 6.1% in September. This could open the door for a moderate loosening of the tight monetary policy as inflation is expected to cool further over the coming months. A loosening would most likely come as a cut in reserve requirements.

In Greece, the leader of the interim unity government still has not been announced. The main candidate remains the former ECB Vice President Lucas Papademos. According to WSJ an announcement is expected tonight.

At the ECOFIN meeting the bank recapitalisation was on the agenda. The work continues to establish a coordinated approach to term funding at EU level? and possible options for guarantee schemes? were examined. Furthermore, Olli Rehn said that he expected the strengthened governance rules (the six-pack) will be in place by mid December, see statement.

The US stock markets bounced between positive and negative territory, until the announcement of Berlusconis future resignation. The S&P 500 ended the session up by 1.2%. The Asian stock markets are also up this morning fuelled by the Chinese CPI data. Nikkei is up 0.9% while Hang Seng is up 1.6%. US bond yields increased overnight as risk appetite increased and 10-year yields are trading at around 2.07% this morning. In the FX market EUR/USD surged to above 1.38 on the news from Italy.

Later today we will release an update on our global growth outlook. The world economy is increasingly decoupling with US and China recovering, while the euro area is expected to go into a mild recession. The main revision is that we have lowered our euro area 2012 growth estimate to 0.3% from 1.1%. Reduction in inventories, tightening of lending standards, lagged effects from the slowdown in US and China in H1 and more fiscal tightening are weighing down on growth. Q4 GDP is expected to decline 0.3% and Q1 GDP is seen at -0.1%.

Global Daily

Focus today continues to be on Italy and Greece where we could see further relief following the news that Berlusconi plans to resign following the Parliament's approval of the 2012 budget next week. There are no important global data on the agenda. Fed chairman Ben Bernanke will give a welcome speech at a conference on "Small Business and Entrepreneurship During Economic Recovery", but we do not expect this to add much new following last week?s press conference where he commented extensively on the economy. Earnings reports from General Motors, Cisco, HSBC and A.P. Møller Maersk may attract some attention.

Fixed income markets: Italian bond yields rose to a euro area record yesterday as focus continued to be on the unstable situation in Italian politics. The news that Berlusconi has promised to resign is expected to give some support to Italian bond markets today, but the resignation certainly does not solve the issue that Italy simply has far too much debt and that Italian government bonds are dangerously close to facing e.g. a higher margin at the LCH (London Clearing House). This could make the problems for Italy even worse. This week is a fairly light week in terms of issuance in the euro zone, with only the AAA-rated countries coming to the market. However, today the Finnish 10Y auction will be an excellent opportunity to buy decent quantities of one of the few high-quality European names left. It will be the last auction in Finland this year. For more on the Finnish auction see our preview Government Bonds: Auction preview of 6Y and 10Y Finnish govts.

FX markets:. In the FX market all eyes are on the situation in Italy. After Berlusconi promised to resign yesterday we saw a small relief rally in EUR/USD, but nothing dramatic considering that equities and oil prices are all higher. However, given that the market according to the weekly IMM data is speculative short the euro, we expect modest support to EUR/USD today. We note that USD/JPY has now broken below the 78-level that was established after the BoJ intervention two weeks ago. A move lower in the USD/JPY is also favoured by our short-term financial model that provides a fair-value estimate of 76.6. That said, we prefer to play long JPY against EUR with our model pointing to a fair value of 105 for EUR/JPY. For more on our model estimates see FX Market Update: Consider selling EUR/JPY for a 105 target that was published yesterday. Other than the debt crisis we will also keep a close eye on the Riksbank minutes that might provide valuable information on whether the Riksbank will cut rates or not in December.

Scandi Daily

This morning we get a set of interesting data from Sweden. Industrial production and orders for September will provide further information on how the third quarter ended as well as how the final quarter will turn out. We expect orders and production to (continue to) edge lower as signalled by PMI and NIER data as well as flagging German production data. We also get Minutes from the Riksbank's last monetary policy meeting. Given that the market is pricing something between the Svensson/Ekholm and the Riksbank alternative low interest rate scenario, including almost a full 25bp cut already in December, focus will be to what extent (and why) any member within the majority touched upon a rate cut now or an even lower rate path.