Japan Intervenes, Euro Drops Below 1.40

Japan rocked FX markets by another intervention, China plays down Europeean hopes as Italy remains in the spotlight, German retail sales set to slip further, Eurozone and Italian CPI seen slowing, UK mortgage approvals slip back, US Chicago PM due.

The Japanese yen hit another post war high vs the dollar at 75.30s, prompting Japanese to intervene unilaterally for the first time since August.

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Last night's release of Nomura PMI data for October improved slightly from the previous months 49.3 coming in at 50.6.

If European leaders were hoping to find a white knight in China, their expectations were soon firmly tempered when the Chinese news agency Xinhua stated that "China can neither take up the role as a saviour to the Europeans, nor provide a 'cure' for the European malaise," it stated. "Obviously, it is up to European countries themselves to tackle their financial problems."

Fears about the continuing rise in Italian bond yields appear to be overshadowing the recent euphoria over last weeks bailout package as closer inspection on the deal reveals a number of obstacles to a successful outcome. Last weeks Italian auction saw 10 year BTP yields close above 6% for the first time since the launch of the euro and with the Italian government needing to raise another 42bn by year end, concerns are rising that Italy could be the next domino to fall, with the newly expanded EFSF unable to cope.

Todays economic data is expected to show that German consumers remain reluctant to spend with retail sales slipping in October from 2.2% in September to 1.6%. Eurozone and Italian CPI for October data is expected to show that inflation pressures continue to subside ahead of this weeks key ECB rate meeting, with EZ CPI for October expected to slip back to 2.9% from 3%, while Italian CPI is expected to fall back from 3.6% to 3.5%. Unemployment in the Eurozone is expected to stay at 10%, despite last weeks shocking Spanish numbers, showed that unemployment there hit 21.5%, and youth unemployment 45%.

In the UK the housing market continues remain under pressure after the latest Hometrack survey showed house prices for October fall 2.8% for October while mortgage approvals for September are expected to slow from the previous months 52.4k, coming in at 50.6k. The Lloyds barometer of business confidence also slid further to -15 in October.

In the US the latest Chicago Purchasing Manager index is due and expected to reflect the recent recovery in Michigan confidence numbers seen last Friday.