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All the indications are that European leaders are moving towards what markets have viewed as inevitable for months, namely a write-down on Greek government debt.   This is the chatter emerging from the IMF meeting in Washington.   Reports suggest that even the Greek finance minister sees a 50% write-down as the best of the available options.     There is also talk of a further enhancement of the European Financial Stability Fund (EFSF), boosting it from the proposed EUR 440bln to around EUR 2trln, either via loans from the ECB, guarantees or a combination thereof.   On one level, these developments are positive.  

However, once again the measures are merely catching up with what has been market thinking for the past several months (Greek default, greater EFSF firepower) and what’s not changed, are the crippled institutional and leadership arrangements of the eurozone. This has been one of the main barriers to resolving the eurozone crisis and may yet cripple these new initiatives. Perhaps wisely, the euro is not jumping for joy in early trading today.

Guest post by FxPro


Pressure mounting on the ECB.   The next meeting may be a week and a half away, but the pressure on the ECB to cut rates appears to be increasing by the day.   A crisis tends to pull countries together, as there is more that unites than divides. The recent meeting of G7 finance ministers and central bankers produced little, but the next G20 meeting early November will have a greater weight of expectation for more concrete proposals. Exactly what these will be, beyond the platitudes contained in the statement overnight, is not easy to see. One of the steps gaining increased traction in markets is an easing of policy from the ECB and possibly an inter-meeting move. However, the penultimate paragraph of the G20 statement last week stated that “monetary policies will maintain price stability and continue to support economic recovery”. This has the ECB’s fingers all over it and suggests that for the moment, Trichet’s mindset has not changed. An inter-meeting move looks unlikely, but a rate cut before the G20 meeting on 3-4 November is more likely than not and would confirm our long-held belief that both the ECB’s rate increases were mis-guided.

US rail shipments defy recession fears.   Rail shipments data, which correlate very strongly with US industrial production, rose in August to the highest level three years. At a time of growing conviction that the American economy has fallen back into recession, these figures suggest that perhaps the economy is holding up better than many expect. Interestingly, industry insiders suggest that rail shipments will remain respectable over coming months. For example, Union Pacific suggested that the week before the Labour Day holiday saw the biggest weekly volume so far in 2011, while Norfolk Southern have made similar remarks about demand.

The Fed twists and the market shouts.  The global pandemic engulfing the major financial markets has continued in the tail-end of last week, despite a brave early attempt to shrug off the growling bears. Unfortunately, although the Fed decided to twist, the market shouted! European equities experienced further heavy selling Friday, apparently unconvinced by the platitudes contained in last night’s G20 statement – the DAX fell below 5,000 at one stage, down another 3.0% to its lowest level since the summer of 2009. The FTSE 100 likewise has fallen well below 5,000 to 4,950, a 14m low, with mining stocks especially hard hit. Bonds and the dollar remains in peak demand, with the dollar index back up at 78.50 and the US 30yr bond yield at just 2.75%. Commodities were hammered once more -gold comfortably below USD 1,700 with some evidence of forced sellers to cover for losing positions elsewhere, while crude oil on Nymex down below USD 78 a barrel, down from USD 100 just two months ago. The copper price collapsed another 5%, a fall this month of 16%, while aluminium is down 7.5%, a loss this month of 25%. High-beta currencies are lower again, the Aussie now under 0.97.