Tuesday's Markets

Asian stocks staged their biggest rally in since April 2009 after hitting 16-month lows yesterday.  Wall Street's sharp gains on Monday, encouraged by favorable noises from Europe and action in the US Senate to avoid an imminent closure of the government and a repeat of last month's farce.  The dollar  has been confined to yesterday's trading ranges against the euro, Swiss franc and yen.  The initial attempt to take sterling higher succeeded, but only to fail in front of $1.56.  The dollar-bloc which has been the most beaten up over the past week have risen through yesterday's highs.  The price action underscores the consolidative/corrective tone as participants await fresh developments. 

There are two important votes today.  The first is in Greece where parliament votes on the new property tax.  The government has a a 4 seat majority, but there have been six MPs who have threatened to vote against the measure.  A defeat by the government would likely be euro negative as it would put at risk the Troika's return and approval of the next tranche of aid. 

The second vote is in Slovenia.  It is on the reform of the EFSF.  The government there collapsed last week, but it is still trying to pass the necessary legislation.  A deeat here too would be euro negative.  Finland votes tomorrow and Germany on Thursday on the EFSF reforms.  Slovakia, the last country to vote, is expected on Oct 11.  

French Socialists took control of the Senate yesterday for the first time in more than half a century.  It is more symbolic of the weakness of Sarkozy than suggestive of a shift in policy per se.  

While there is much speculation over next week ECB meeting, those anticipating a 50 bp rate cut may be disappointed.  The August money supply figures released today indicate why.  M3 grow 2.8% in August after a 2.1% pace in July.   Private sector lending also increased to 2.6% from 2.4%  in July.  While money supply growth  remains well below the ECB's 4.5% reference rate, we note that the ECB raised rates even when M3 was growing at a slower rate.   This reinforces the likelihood that the ECB continues to focus on liquidity measures.  A 25 bp rate cut would seem to be an admission by Trichet that the July rate hike was in error.  This may be difficult enough, but a 50 bp cut  would seem to be too big of an admission. 

Soft UK data continues to fuel speculation that the BOE can resume its asset purchase program early in Q4.   The UK CBI distribution trades report showed slight deterioration that was sufficient to put the reading at its lowest since May 2010.  There was no rebound after the Aug report where weakness was dismissed by some due to the distortions caused by the social unrest. 

Lastly, note that the month end, quarter end and the end of the Japanese fiscal half year may also impact trading in ways that are difficult to forecast and there are many cross currents.  This will make it harder to separate noise from the signals.