Focus Turns to Europe as Eurogroup Meets in Brussels

Attention shifts to Brussels and Eurogroup meeting as concerns about Italy mount, China inflation hits 6.4% and trade surplus widens, while aftershock from US payrolls shifts to start of earnings season and tomorrows FOMC minutes. Sterling rebounds ahead of inflation data this week.

With little in the way of economic data today the focus looks likely to remain on the ongoing situation in Europe with todays meeting in Brussels of euro zone finance ministers. Reports at the weekend suggest that EU leaders are beginning to think about ways of lowering the debt burden on Greece, though how this would be worked out isnt likely to take some form of shape for some weeks yet. Concerns about Italy remain as Italian regulator insists on full disclosure of short positions ahead of this weeks bank stress test results.

Concerns about the global recovery continue to weigh on investors this week after Chinas inflation rate jumped to 6.4% for June, while the trade surplus widened to $22.7bn, driven higher by a slide in imports as growth starts to slow and demand drops off. A 14.4% rise in food prices drove the rise in inflation which explains last weeks rise in interest rates.

On Friday attention briefly switched to the US and the extremely disappointing payroll figures for June, which came significantly lower than expected and have raised concerns about the sustainability of the current US economic recovery, amidst the backdrop of the stalemate between Republicans and Democrats with respect to the raising of the debt ceiling and fears of a possible US default.

Current market thinking is that policymakers will see sense and avert such a scenario, however politicians could well take it to the wire as each side looks to the other to see who will blink first.

Fridays payroll figures have raised expectations of further QE, however this seems unlikely given the current political deadlock and we could well see the Feds thinking with respect to this with tomorrows release of the latest FOMC minutes. With earnings season starting tonight with Alcoas results markets will be looking for any silver linings with respect to a rebound in risk after Fridays nasty surprise.

The pound was also be in focus this week, having rebounded on the back of European woes with both inflation and retail sales data due out, however it is likely that prices will continue to remain high and sales sluggish, especially given this weekends news of inflation busting energy price rises, this time from British Gas, starting next month.