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European markets have held up fairly well despite last night’s sovereign downgrade of Spain by Standard & Poor’s, with the larger focus being on the more positive side of the equation, and some fairly positive company updates.

The disappointing U.S. Q1 GDP update has once again prompted speculation that the Federal Reserve be prompted to ease monetary policy further, as markets look towards another liquidity shot. Given the tone of the FOMC meeting earlier this week they could well be headed for disappointment but investors appear to be focussing on the comments that the Fed remained ready to act, keeping a floor under the market. The main unknown remains with respect to the height of the bar that would prompt further action.

Positive broker comment has driven gains in fund manager Man Group (EMG LN) as the company posts its first positive week in six weeks on a combination of bid speculation, and improved broker sentiment. The construction sector has received a boost with building group CRH (CRH LN) helped higher by a ratings upgrade while British Land (BLND LN) is also higher. Banks are leading the markets higher in the UK led by Barclays (BARC LN) despite a shareholder revolt over pay at its AGM.

On the downside, Costa Coffee owner Whitbread (WTB LN) is lower giving up some of yesterday’s gains after good results yesterday. Defensive telecommunications are also underperforming with Vodafone (VOD LN) and BT Group (BT.A LN) both lower.

U.S. markets opened higher today despite the latest Q1 GDP number coming in shy of expectations at 2.2%, below the 2.5% expected by analysts. The low number was offset by the final University of Michigan confidence survey which came in at 76.4, well above expectations of 75.7, and the highest level for over a year. Personal consumption did jump sharply rising 2.9%, well above expectations of 2.3%, suggesting that the warmer weather may have seen some Q2 spending brought forward.

It appears that markets are hoping that the weaker print could well prompt further easing sooner rather than later, given that Bernanke said the Fed remained ready to act. The main unknown remains with respect to the height of the bar that would prompt further action. Follow through remains muted however as markets slide back from their intraday highs ahead of the weekend as well as next week’s U.S. payroll reports.

U.S. company earnings continue to come out on the positive side with a whole host of positive updates keeping the market well supported. Ford beat expectations in Q1 coming in at $0.39c a share, above expectations of $0.35c, on the back of increased revenues. Proctor & Gamble also beat expectations for Q3 of their fiscal year, coming in at $0.94c a share. This was above expectations of $0.93c a share, however revenues were slightly below expectations. Merck also came out with Q1 figures above expectations on earnings and revenues.

The U.S. dollar has been the currency markets whipping boy again today helped on its way by the poor GDP print prior to the U.S. open on expectations that the Fed could well ease further in the event the economy weakens further. As a result the commodity currencies have risen sharply with the Australian and New Zealand dollar the main gainers.

The Japanese yen has also pushed higher after the Bank of Japan eased monetary policy but not by as much as the market had expected injecting a net 5trn yen.

The Pound is also higher, hitting new 22 month highs against the Euro and seven month highs against the U.S. dollar.

Gold prices have edged higher after this afternoons GDP number from the U.S., came in light prompting concerns about further loose policy from the Fed, while silver prices have also pushed higher for the same reason.

Unusually oil prices have failed to follow through on the weaker U.S. dollar theme, with demand concerns on slowing economic data outweighing QE speculation.

Copper prices also pushed higher after the GDP data predominantly on the back of the weakness in the U.S. dollar.

European equity markets will today get a stab at reacting to Friday’s overtly disappointing jobs numbers in line with their U.S. counterparts yesterday.

Following what can only be described as a stellar first quarter to 2012, the fact that only 120,000 jobs were added last month, severely missing the estimates of +200k, could see a less exuberant tone for the week ahead.

Last week’s FOMC minutes implied that QE was not under consideration in the near term, but as to whether this will now be seen as a catalyst for further stimulus from the Fed or shrugged off as an anomaly in the generally resilient recent fundamentals will no doubt be an additional decisive factor for equity market direction this week.

Bernanke, speaking at an event in Georgia last night avoided any discussion on interest rate policy. Given that several other Fed members will be speaking at various events this week, with Lockhart up first today, the language used by each will be carefully noted and any clues that they are not singing from the same hymn sheet could see a choppy week prevail.

A further headwind for investor sentiment is that of China’s slowing economy which continues to both contradict and confound. The high inflation number; rising to 3.6% in March against expectation of 3.4%, this could well curb the possibility of a reserve requirement cut by the PBOC and most certainly does not adhere to Governor Xiaohuan’s plans of achieving a soft landing through lower inflation. The unexpected trade surplus of $5.35bn signals a stronger external demand but also serves to underpin the delicate balancing act of any type of stimulus as domestic consumption clearly slows.

The beginning of a short trading week and the beginning of earnings season, the economic docket today has Europe’s core economies in the limelight.

The Sentix Investor Confidence survey is unlikely to inject much euphoria, a small rise from last month’ -8.2 points is expected, but the index will remain firmly in the pessimistic zone.

Germany’s trade balance surplus is expected to a squeeze back from €14.2bn to €13.6bn while in France, the industrial production is likely to remain on the soft side and expectations are for a smaller rise than that of last month of 0.2%

EURUSD –the 1.3150 level is heavily resistant to upside in the single currency (38.2% of the Jan/Feb Uptrend as well as the 100 day MA) and above that the key 1.3180  and lessens the possibility of a return to the 1.3280 level. The 1.3050 remains intact as support. While in this range the 21 and 55 day MA should cap upside while a fall back through the support of 1.3050 opens the possibility of a fall back through the 1.0 area

GBPUSD – the 1.5820 level has retained support status with the pound using it as a base to break through the 200 day MA and the 1.5870 level. Further strength in the pound could be seen if the move continues above 1.5935 which would then target 1.6000 level. Below 1.5820 could mean a fall back to 1.5610 again.

EURGBP – the single currency has seen a considerable decline but has found support at the  January lows of 0.8220. any upside will likely run into resistance around 0.8280/85. A break below the support opens up the possibility for a retest of 0.8140 last seen in August last year. Above the 0.8300 level the 55 Day MA should cap gains around the 0.8350 level.                  

USDJPY –the safe haven tradition has garnered new strength in the Yen and the fall through the 81.80 level poses new negativity for the dollar should the 81.30 level fail then and a return to 80.70 level remains on the cards. Only a convincing close above 83.40 would see a retest of the recent 84.20 highs.

European markets have slipped back sharply this afternoon after trading cautiously in the morning session. The catalyst for the turnaround has been the lack of any concrete detail with respect to additional IMF funding and that the appetite for EFSF bonds has been less than enthusiastic, as the G20 meeting breaks up with little in the way of progress. It seems that the Cannes debt can has been nudged down the road a little further.

The Greece situation continues to remain uncertain with tonight’s vote of confidence likely to result in the stepping down of Greek Prime Minister Papandreou, which would almost certainly be followed by some form of national unity government, as a stop gap measure with the prospect of elections soon after.

Disappointing economic data has also tempered upside progress after services PMI data from Italy, Spain, France and Germany slipped back further into contraction territory, while German factory orders plunged 4.2% in September.

Outperformers in the financial sector include Royal Bank of Scotland (RBS LN), after reporting better than expected profits for Q3 of £2bn, despite writing down its exposure to peripheral Europe from £4bn to £773m, while increasing its core tier 1 capital ratio to 11.3%.

Chip maker ARM Holdings (ARM LN) is also doing well on the back of a broker upgrade 24 hours ago as well as optimism that its foray into the servers market with its 64 bit architecture, in partnership with HP.

On the downside British Airways owner IAG (IAG LN) is lower after reporting a decline in Q3 profit, as well as on news that it is bidding for Lufthansa’s loss making BMI subsidiary, subject to regulatory approval, as British Airways looks to build up market share. UK competitor Virgin has raised concerns and could still scupper the deal.

Interdealer broker ICAP (IAP LN) continues to feel the fallout from the MF Global saga in the U.S., with the shares trading at 18 month lows.

U.S. markets opened lower despite a slightly better than expected non-farm payrolls report for October. The headline figure was down slightly on expectations at 80k, but the September figure was revised up substantially from 103k to 158k, while the unemployment rate slipped back to 9%.

Starbucks earnings reports last night, after the bell saw Q4 profit jump 29%, with the EPS coming in well above expectations, helped by overseas expansion. Financials remain under pressure with JP Morgan and Bank of America propping up the Dow.

The Euro, after initially trying to break above 1.3850 post payrolls has slipped back in the afternoon session, with upside limited on the back of poor European economic data as well as news that Italy has agreed to allow the IMF and EU monitoring on its progress on labour reforms and austerity measures.

This has sent Italian bond yields surging back towards highs of this week. This move by the IMF and EU is unlikely to go down well in Italy, as speculation about Berlusconi's future continues to fester, with another confidence vote likely next week.

News that countries remain reluctant to invest in the EFSF, which is not surprising given the uncertainty in Europe, has undermined sentiment, as has news that the G20 has failed to agree concrete measures to boost the IMF’s resources.

The Canadian dollar is among the biggest losers today after October jobless figures came in with a net loss of 54k, missing expectations of a gain of 15k.

The Swiss franc is the biggest loser today on the back of speculation that the SNB might well be tempted to intervene again amidst talk that they might raise the floor on EURCHF to 1.25, as the cross dropped near to the 1.21 level. The U.S. dollar is the biggest gainer so far today.

Gold prices remain fairly well underpinned and look likely to remain so given the prevailing uncertain outlook in Europe. It continues to hold above its 55 day MA above $1,740.

Oil prices remain capped below their 200 day MA on both the Brent measure as well as the WTI measure limited by the lack of upside potential on equity markets, due to the overhang of problems in Europe.

Copper prices continue to tread water near their recent highs, but have slipped back from yesterday's highs as equities have declined.

The G20 summit concludes in Cannes today but continues to be overshadowed by events in Athens, as leaders look at ways of boosting the funds of the IMF, while reiterating an action plan for global growth that was the cornerstone of the previous communiqué in September.
 
The situation in Greece continues to act as a backdrop to markets though there does seem a greater semblance of calm ahead of tonight’s key confidence vote in the Greek parliament, which Papandreou could well lose, given the events of the last 48 hours.
 
There are also unconfirmed reports that Greece’s Papandreou has brokered a deal with ministers to hand power to a coalition government if they help him win tonight’s confidence vote, though why he would do that is not really clear.

Politicians of opposing parties continue to bicker along party lines as well as amongst themselves, which doesn’t really add to confidence. Opposition leader Samaras continues to press for a transitional government with a view to renegotiating the second bailout, but insists that his New Democracy Party plays no part in it. The referendum idea does appear to have been quietly buried for now.
 
Italy meanwhile continues to come under pressure with its 10 year bond yields hitting post euro highs at 6.40% just prior to yesterday’s rate cut by the ECB, though they did slip back after the rate cut.
 
Anyone expecting a radical change in tone from the ECB yesterday, with the introduction of Mario Draghi would have been disappointed, but at least we got a cut in interest rates of 0.25%, with the likelihood that more will follow in light of the recent turmoil, and disappointing economic data that Europe has had to contend with this week.

At his press conference Draghi stated that Europe was heading for a mild recession, while also appearing to signal a slightly more practical outlook in focusing on growth and employment to the detriment of inflation, suggesting that this cut could well be the first of a number.
 
He also stated that the ECB’s bond buying programme remains temporary in nature and would not be significantly expanded to support Italy and Spain, turning up the heat on his compatriot Italian PM Silvio Berlusconi to implement fresh austerity measures.
 
The weak nature of the European economy is expected to be reinforced by today’s final services PMI data for October from Germany, Italy, France and the Eurozone. While German PMI is likely to remain in expansion territory at 52.1, all the others are expected to remain firmly in contraction territory at 45.5, 45 and 47.2 respectively.
 
In the U.S. the latest non-farm payrolls report is due for October with expectations that 96k jobs will be added, down from last months 103k, while the unemployment rate is expected to remain unchanged at 9.1%, underscoring the Fed’s concern earlier this week, about the slow rate of jobs growth.
 
EURUSD – the Euro is currently pining between the support around this weeks lows around 1.3650 and the resistance at the 1.3850 level referred to in the previous two days notes. The single currency needs to close the week below 1.3850 to reinforce the bearish scenario, and post a bearish weekly candlestick. If the euro is able to do this it will bring back into focus the longer term objective for a move back towards the 1.3000 level. A move beyond 1.3850 could well retarget the 1.4000 level. A close below 1.3650 re-targets further losses towards 1.3520, on the way back to the lows at 1.3150.
 
GBPUSD – the key level on the top side continues to be the 200 day MA at 1.6140 and this week’s high point. On the downside we appear to have some fairly solid support just above 1.5850. As such the downside potential in cable remains intact while below 1.6140. A move beyond 1.6140 targets 1.6300. A break below the 1.5850 level could well open up further losses towards 1.5630. For the time being rallies are being capped around the 1.6060/70 level.
 
EURGBP – yesterday’s moves respected the range of the past couple of days, holding above the solid range support at 0.8530 while at the same time respecting the resistance towards 0.8650 for the second day in a row. A move beyond 0.8650 targets 0.8720.  As such the broader range of 0.8500/0.8800 remains intact, however the bias remains for a test lower towards 0.8450, followed by 0.8305, on a break below 0.8530.
 
USDJPY – the U.S. dollar appears to be settling down again here, however today’s U.S. payrolls data could well alter that. The support around the 77.70 appears to be holding for now as concern about further intervention tempers aggressive short positions, after this week’s earlier failure to push beyond the 200 day MA at 79.70/80 and also trend line resistance from the 2007 highs at 124.15 just above 79.80. Only a move and close above this key level could well signal further U.S. dollar gains, otherwise we could see a drift back lower, on a break below 77.70.

Last night’s meeting in Cannes, ahead of today's G20 summit, between Greek Prime Minister Papandreou and Merkel and Sarkozy, saw the setting of a referendum date of 4th December. It remains unclear as to the exact wording of the question and this could well determine the outcome.

The failure of both the German and French leaders to change Papandreou’s mind is sure to have an unsettling effect on markets. It was made clear by them however, that the next tranche of Greek aid money would not be released until after the vote, which with a €12bn bond payment due on the 11th December means they are cutting it pretty fine.
 
There was also a distinct change of tone and emphasis, on the part of both Merkel and Sarkozy as both leaders said it was up to Greece to abide by the rules of the Eurozone or leave it, in a sign that the ground was being prepared for a possible Greek exit.
 
In any case we still have the small matter of a confidence vote on Friday in the Greek parliament, which could bring about a government collapse, and see the referendum plan potentially shelved. Even so it may well be very difficult for another government to turn around and say that they are not having a referendum, having seeing hopes raised that they would be getting one.
 
Yesterday’s disappointing PMI data out of Europe suggests that the European economy is tipping back into recession which makes today’s rate meeting of the ECB council all the more important given that it is Mario Draghi’s first as ECB President.

For quite some time now the ECB has been widely criticised for its interest rate policy and given this weeks events, speculation has risen that we could well see a rate cut. Given the ECB’s stubbornness on matters of inflation it would not surprise if they held rates but in light of this weeks Greece events, as well as the poor growth data a 0.25% rate cut can’t be excluded.

If we don’t see a cut today, or an indication of one, we could well see some fierce questioning at the press conference afterwards along the lines of what will it take for the ECB to cut rates given that recession signals are flashing red all over Europe?
 
Today’s Spanish bond auction will be a key test for Spain and bond yields as the Spanish government look to raise money in this rather febrile environment. This is a particular worry for Spain on the back of yesterday’s decision by EU policymakers to pull an auction of €3bn by the EFSF, due to investor uncertainty. The big worry remains Italy after Berlusconi’s cabinet yesterday outlined a new budget plan that didn’t include plans to change tax rates or reform labour markets.
 
In the UK today’s October services PMI will be closely scrutinised for signs of weakness in light of the rather mixed figures seen earlier this week. Expectations are for a slight dip back from September’s 52.9 to 52, though given last months decision to restart QE we could well see an even bigger drop.
 
In the U.S., last nights FOMC minutes showed that the Fed remained greatly concerned about the state of the U.S. economy, so much so that we got the first 3 way policy split on the FOMC, when Chicago Fed’s Dudley voted for further QE, though he was the only one to do so, putting him at odds with the 3 hawks as well as the rest of the committee who voted to hold pat. The Fed also downgraded the growth forecasts for 2011 to 2.5%-2.9%, from 3.3%-3.7% and 2012, as well as adjusting the unemployment numbers higher to 8.5/8.7%, from 7.8/8.2%. Bernanke did leave the option for further stimulus firmly on the table, however if the economy started to slip back again.
 
Today’s U.S. weekly jobless claims are expected to remain around the 400k mark, while the latest services ISM for October is expected to rise slightly from 53.0 to 53.6.
 
EURUSD – yesterday’s move off 1.3650 saw the single currency move back towards the 1.3850 level referred to in yesterday’s note, stopping just short at 1.3830. The single currency needs to close the week below 1.3850 to reinforce the bearish scenario. This weeks decline once again brings back into focus the longer term objective for a move back towards the 1.3000 level. A move beyond 1.3850 could well retarget the 1.4000 level. A close below 1.3650 re-targets further losses towards 1.3520. The outlook remains for a longer term move towards 1.3050, which is the 61.8% retracement level of the 1.1880/1.4940 up move.
 
GBPUSD – after this week’s failure at the 200 day MA at 1.6140 saw cable slide back and hold above support at 1.5850, yesterday’s rebound failed at 1.6060, slightly overshooting the 1.6020 area. As such the downside potential in cable remains intact while below 1.6140. A move beyond 1.6140 targets 1.6300. The 1.5850 level continues to keep a floor under the downside, but a break below this level could well open up further losses towards 1.5630. For now we could see rallies find resistance at 1.6020.
 
EURGBP – the failure to push below the support at 0.8530 prompted the pullback as expected towards 0.8650 yesterday. A move beyond 0.8650 targets 0.8720.  As such the broader range of 0.8500/0.8800 remains intact, however the bias remains for a test lower towards 0.8450, followed by 0.8305, on a break below 0.8530.
 
USDJPY – the fear of further intervention by Japanese authorities continues to keep a floor under the US dollar around the 77.70 area, after this week’s earlier failure to push beyond the 200 day MA at 79.80/90 and also trend line resistance from the 2007 highs at 124.15 at the same level. Only a move and close above this key level could well signal further US dollar gains, otherwise we could see a drift back lower, on a break below 77.70.