European markets jump after US debt boost

Reassurances from the US that short-term measures will be instigated to avert the upcoming debt-ceiling deadline have given European equity markets a jolt upwards, helping to stem some of the risk aversion of the past few days.

News that Hong Kong has raised collateral haircuts on US treasury bills appears to be something of a warning shot to US politicians. The implications are that US treasury bonds are considered broadly more risky and the Hong Kong exchange is clearly preparing for the worst case scenario – a US default. The more likely explanation is that Hong Kong is simply telling the US to get its act together.

In early trade the FTSE 100 has added 0.8%, with the financial sector leading the way. Royal Bank of Scotland has added 2.66% on reports that it will begin offering loans under the Help to Buy scheme this week. Not surprisingly, British energy supplier Scottish & Southern Energy has seen a marginal increase in its share price following news that it is to hike energy prices by an average of 8.2% next month. The renewed interest in more risky assets appears to be keeping a cap on gains.

While Germany's industrial production output rebounded in August, the same trajectory is not apparent for France or Italy. Today’s data releases failed to meet consensus expectations. Italy in particular is a concern, after industrial output declined for a second month in August, and coupled with record unemployment will in no way help it to exit its two-year recession.

Sterling has bid something of a retreat against both the euro and dollar over the past two weeks. The fall below the $1.60 level against the dollar yesterday does tend to put the bias on a weaker pound in the short-term, especially if we see more concrete decisions from Washington. The Bank of England is to meet later today, but we are not expecting to see any changes in respect of the current bank rate or asset purchase facility. Given current heightened UK inflation levels and governor Mr Carney’s recent proclamations that he does not anticipate the necessity for additional QE, the MPC statement is unlikely to offer any surprises at this juncture.

In the US, the main focus will be on unemployment claims, given how jobs data is dependent on the current QE programme. Nevertheless, the mixed viewpoints on when to scale back QE were very clear in last night’s FOMC minutes and go some way to explain the ‘forward guidance’ muddle of recent months.

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