Financials Lead Equity Markets Higher on Improved Risk Sentiment; FTSE Continues Rally Above 5200

Equity markets (with financial stocks being the stand outs) are broadly higher as markets run on the expectation that a European aid package is on the verge of being accepted by the member states of the EU. This assurance could turn violently, however, if these expectations are not met as it will increase the likelihood that Greece will not meet next month's repayment deadlines.

The Eurozone situation will continue to be the main driver of sentiment and as long as the Federal Reserve does nothing to suggesting a more accommodative monetary policy, the US Dollar is set to continue its rally against the high yielders. Another factor that could play into this is the increasing chance of rate cuts from the ECB. The Euro and Pound, in particular, could still see drastic declines into the end of this year if this actually comes to fruition. At the moment, the EUR/USD is relatively flat at 1.3420-1.3575 while the USD/JPY trades in a 76.20-76.50 range.

In Japan, the Finance Minister (Azumi) made comments saying that Japan is willing to purchase bonds from troubled regions after the ECB pushes through its bailout program. This might seem surprising on the surface, but given the effect that the strong Yen has had on the country's export companies, a move from the Japanese government to buy European assets could be a “win-win” for both regions. There were no additional comments relating to intervention policy so it appears that the BoJ strategy might have changed in light of the situation seen in Europe.

In the UK, CBI sales data for the month of September dropped to -15, but this was not a significant deviation from the market consensus. The expectations component was much lower from the previous month, coming in at -14, and contributed to the decrease in the headline figures. The data is supporting the recent bias shift that was seen in the UK's MPC, which has started to imply in press releases that we will see another round of QE stimulus in the UK. This should be moderately supportive for the FTSE but will have the reverse effect on the British Pound.