Mood Lifts on News of Euro Banks Plan

NEW YORK ( BBH FX Strategy) - Following Wall Street's lead into the close Tuesday, market sentiment continued to improve overnight and into the European session.

The S&P 500 rose 4% in the last hour of trading on news that European financial ministers were working on a plan to coordinate support for European banks. Comments from International Monetary Fund's Antonio Borges suggested the IMF could also play a role in supporting the secondary bond market. This followed indications from Japan that it was willing to up its investment in the European Financial Stability Facility.

As a result, stocks continue to move higher, while short-term bund and gilt futures push lower. Moody's rating downgrade for Italy is having a limited impact, with European banking shares are up nearly 2.5%. Eurozone data showed softer PMI and retail sales.

For the recent consolidation in risk appetite to hold and more importantly for it to be maintained in the coming weeks the markets in some part need to see a bold policy response from Europe and a continuation of better economic data performance. We suspect that the EUR-USD is driven in part by a combination of risk appetite and position squaring ahead of the European Central Bank meeting Thursday.

Elsewhere in Europe, UK September services PMI unexpectedly rose to 52.9 from 51.1, much better than the 50.5 consensus forecast. The rebound follows what had been in August the second biggest fall in the data series on record, in falling from 54.1 to 51.1. The headline data caught market attention as the UK service sector accounts for about two thirds of the total economy, and should lessen the odds of a QE2 announcement tomorrow by the BoE.

In the emerging markets space today markets are likely to be focused on central bank policy and data.
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