Contagion Spreads To Germany

Stock markets recovered overnight
despite a huge drop in the Dow Jones, but markets remain nervous and rebound in
risk assets could be brief. A disappointing bond auction yesterday in Germany was a
reminder to everyone of seriousness of contagion across the Eurozone. The
reason for concern is if the core is being hit then there is no safe haven in Europe any longer. However this may kick-start a reaction
in German officials and realise that they need to act swiftly to provide
solutions to the crisis.

Despite US data, it’s a pretty
poor picture, in particular China’s
HSBC November weaker purchasing managers’ indices coming in below the 50
boom/bust level. Europe’s weaker purchasing manager indices emphasize the
projection for recession while the news in Germany is both poor on the bond
front and also on the data front. Today’s German November IFO survey will
continue in the same vein, with additional weakness in this business survey
expected.

A lack of liquidity due to the US
Thanksgiving holiday will mean the markets are set for dramatic moves. EUR/USD
has already sustained a drop below the important 1.3500 level as even the
underling strong Asian demand appears to have been pulled back. More downside is
expected but technical indicators suggest that it will be hard trudge lower,
with near term support seen around 1.3285. The near term range is likely to be
1.3285-1.3505 although given the US holiday the range may be even
tighter.

Apart from the IFO attention
today will focus on a meeting between Chancellor Merkel, President Sarkozy and
Prime Minister Monti. As usual expect a lot of hot air but little action. Also
note there is a general strike in Portugal today protesting against
austerity measures in the country.

Report by Philip Ryan