€600 billion: Not enough to buy Italy la dolce vita

Last week saw significant risk aversion played out as stock markets dropped dramatically. This week looks a little firmer. Articles in the Italian media suggest that the International Monetary Fund is preparing a €600 billion deal for Italy in the event of deterioration in its debt crisis – this could provide market support in the early part of the week. Further support may also come from reports in Germany that German Chancellor Angela Merkel and French President Nicolas Sarkozy are putting together a “stability pact” for euro countries that will look similar to the Schengen agreement. Nevertheless, neither story has been confirmed so as usual the chances of disappointment are high. 

As we end November, market orders are likely to fall and liquidity is likely to thin out with plenty of events and data on tap… volatility is guaranteed. That includes bond auctions in Belgium and Italy today (28 November) and France and Spain later in the week, which take place against the background of Germany’s failed bond auction last week. Germany's troubles have added further anxiety to the bond markets. Under the spotlight tomorrow will be the meeting of the Eurozone's finance ministers, given the lack of steps forward on many issues (especially Eurobonds).

The majority of significant data this week will come from the US, in the form of non-farm payroll data, the ISM manufacturing survey, the Beige Book and the consumer confidence report. Thanksgiving holiday weekend for retailers in the US means its data will continue to show progress, but this may not be enough to stem speculation that the Federal Reserve is on the brink of buying mortgage-backed securities in a third round of quantitative easing.

With risk back on the menu, traditional risk currencies like the euro and Aussie dollar have rallied in the early part of the session. One would expect any gain in the euro to prove limited and weak if the European press reports are confirmed. EUR/USD will find upside resistance around the 1.3412 level, while the risk of a downside test of support around its 4 October low at 1.3146 remains high over the coming week.