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Date Posted: 01:05:42 05/24/12 Thu
Author: Charisse Bartoli
Subject: Markets stable, but questions remain

This morning, financial markets are stable after European leaders put off key decisions until a June meeting. We're told that in the interim, the EU's institutions would be drawing up proposals for fiscal coordination including plans for euro bonds. The latter is what may be helping to stabilise markets at present, because it represents the first step towards full European fiscal unity, which is ultimately the only way the euro will survive in its present form. Any euro bonds would be backed by all nations, so would therefore would have a much lower borrowing cost compared to the soaring cost of bonds for the likes of Spain. The problem is that so far Germany has voiced resistance to these euro bonds, though has left the door open to shorter term 'project bills'.

Despite the reassurance being offering by European politicians, this appears to be another case of 'extend and pretend', with the general message coming from the European Council being that they are 'working on it'. Any June plan would be limited to 'building blocks' and 'working methods' according to the FT. In other words, despite the fact that Europe is standing on the brink, European leaders still cannot agree on a cohesive plan. Whether markets buy it this time is the trillion euro question.

The main movers so far this morning are the higher yielding Australian and New Zealand dollars, with the NZD/USD up 0.18% and the AUD/JPY & AUD/USD up 0.15%. Gold is down another 0.12% but did stage an impressive rebound off the lows last night in line with a general stock market rally.

Other pairs are flat with the euro generally unmoved by last night's summit outcomes.

Coming up today we have a raft of European data points. It's not started well with French manufacturing and services PMI coming in below estimates. The real test comes at 08.30 with German flash manufacturing, followed by German Ifo business climate at 09.00. Europe wide flash manufacturing is also released at 09.00.
Revised UK GDP numbers are released at 09.30 with no change expected.  At 13.30 we have US core durable goods orders, along with US unemployment claims.  At 14.00 ECB president Draghi speaks.

After another round of extend and pretend from European politicians, there is the potential for further disappointment in financial markets in the medium term. However, markets appeared to have bought these lines in the past so the short term prospects for markets are not automatically southbound. One currency to isolate is the British pound, with has to face a potential revision of its GDP numbers at 09.30. No change is expected from the initial estimate, but a downside surprise should not be discounted, making a downside bet attractive.

A good way to play this may be a LOWER trade on BetOnMarkets.com on the GBP/USD predicting that the pair closes below 1.5650 in 1 days time for a potential return of 145%.

Get this trade now, go to: http://goo.gl/W4H7r

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