Yesterday we saw the first down day for European markets in nearly two weeks as investors started to get nervous about the ECB’s plans to undertake risk assessments on the loan books of the euro zone’s largest banks over the next year or so. Despite this slight setback, Europe’s markets look set to bounce back this morning after Chinese HSBC manufacturing PMI for October came in slightly higher than expected at 50.9, a seven month high. While these tests are certainly welcome news and long overdue, they may also pose a dilemma for the ECB in terms of the central banks credibility after the two previously worthless stress tests of recent years. Maybe this time will be third time lucky? If the banks in question pass them with flying colours then we can probably assume they are merely a box ticking exercise, and probably worthless. On the other hand if they show up large holes in asset quality, which in some cases they would need to, given the rising tide of non-performing loans in Europe, the impact to growth in the medium term would be considerable as the banks either shrink their balance sheets or lending to fill the capital holes. Ideally over the next 12 months the hope would be that the recent recovery in economic data seen in the last couple of months helps boost growth and in turn starts to make inroads into the high levels of unemployment, particularly in the south of Europe. Unfortunately given the problems in the banking system and the prospect of having to wait at least another 12 months before they are dealt with, is likely to make any economic recovery slow and protracted, particularly if banks remain reluctant to lend, due to high levels of bad or non-performing loans. Today’s latest Q3 unemployment numbers for Spain would be a good start with an expectation that the rate will come down from 26.3% to 26.1%, though a large part of any decline could well be seasonal, with the tourist season in full swing. The hope is that any decline can be sustained into Q4, and we did get some green shoots yesterday when the Bank of Spain announced that the economy eked out 0.1% growth in Q3. Also out today we have the latest October manufacturing and services PMI data for France and Germany. We have seen improvements in these numbers in recent months, though the French numbers continue to give cause for concern given that they have consistently lagged behind not only Germany but in some cases Italy and Spain as well. Expectations are for an improvement across the board with French manufacturing and services numbers improving to 50.1 and 51.3 respectively, while Germany’s numbers are also expected to improve to 51.4 and 53.7. The broader euro zone measures are also expected to improve raising hopes that the worst of the past few months is behind them. Politicians at the start of today’s EU Economic Summit will certainly be hoping that the recent improvement is sustained given the likely headwinds coming up, with respect to Greece and Portugal’s budget problems. Unfortunately given the lack of any German government, any decisions on immediate action to boost growth are unlikely to be made at this summit. Back in the US the latest weekly jobless claims are set to continue their recent decline with 340k expected, down from last weeks 358k, while the latest October US manufacturing PMI could well give an insight into the damage to the US economy from the recent government shutdown, though it seems estimates of only a small decline appear to be being priced in with 52.5 expected, down from 52.8 previously. EURUSD – the euro continues to hold above the support at 1.3710 which until recently had been the highs for this year. With sentiment remaining bearish the trend line resistance at 1.3980 from the 1.6040 highs in 2008 remains a key obstacle to a move above 1.4000. Any dips look likely to find support at the 1.3700 level, with a move below targeting the lows this week at 1.3650. The key support area continues to remain at the 1.3450/60 area, with only a break below the 1.3450/60 area which has acted as support this month would signal a move towards the 1.3320/30 level. GBPUSD – we now have twin highs at 1.6260 while behind that we have the key resistance area at the 1.6320 trend line from the 2009 highs at 1.7045. This remains the key level with respect to further sterling gains, but the failure to overcome the 1.6260 area is a minor concern and could provoke a pullback. A break below 1.6110 could well retarget the 1.6000 area. EURGBP – yesterday’s break above the 0.8500 has brought the euro into contact with the 200 day MA now at 0.8534, but as yet has been unable to climb above it. While below this key barrier the bias remains for a move back towards the 0.8420 area in the short term. A move back below the 0.8420 area retargets the 0.8280 level. USDJPY – the US dollar is clinging onto the support at the 200 day MA at 97.20, and while it does so the prospect of a rebound remains. A move below the 200 day MA retargets the August lows at 95.80. The US dollar needs to regain 98.20 to retarget the 99.40 area. CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. 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