Europe gets set for lower open this morning after a sharp sell-off on Wall Street overnight exacerbated fears that we could be about to embark on the long feared global equity market sell-off, after a five year bull market rally. With the Federal Reserve set to end its QE program this month and economic data deteriorating globally, particularly in Europe the concern is whatever the ECB does won’t be anywhere near enough to fill the gap left by the US central bank, against an uncertain geopolitical back drop and a slowing world economy. As the European Central Bank gets set to meet in the shadow of Mount Vesuvius today in Naples investors will be hoping that an eruption of a different kind is avoided after yesterday’s disappointing manufacturing PMI data ratcheted up the pressure on the central bank and Mario Draghi to do more to address the slow slide into stagnation of the euro area. Yesterday’s surprise slide into contraction of German manufacturing has raised expectations that we might see the ECB announce further measures to ease credit conditions in the euro area at today’s press conference. Early chatter out of Europe has suggested that the ECB is being urged to consider buying bundles of “junk” rated loans from Greek and Cypriot banks in a move that is likely to be construed as way beyond its mandate, as well as hugely controversial. It risks turning the central bank into a “bad bank” and expose the European taxpayer to significant losses if, as likely, some of the loans go sour. It would also create a huge conflict of interest in the central banks role as supervisor of the overall banking system. Under current rules the central bank can only buy investment grade bonds, which would mean that the rules would have to be relaxed. This isn’t likely to be supported by Germany or other fiscally conservative countries raising tensions further between governments across Europe. It would also mark a move into hugely uncharted territory as not even the Federal Reserve or the Bank of England went this far with their easing measures. While quantitative easing is considered highly controversial in Germany, particularly as the anti-bailout AfD party is starting to gain significant support, any measure that involves the purchase of assets of dubious quality is likely to invite an explosive discussion and could push Germany further into a corner, given that France has already indicated it intends to push back its deficit reduction target until 2017 as an a fait accompli, rendering the so called “fiscal compact” almost irrelevant. It will be interesting to see what President Draghi makes of this French defiance in light of his consistent comments that structural reform needs to continue. In comments reported last week Draghi said "It is now in the hands of governments to act decisively on further structural reforms, governments should not unravel the progress made in fiscal consolidation, but use any leeway to make fiscal policies more growth-friendly." It would be helpful if the French government actually showed it was serious about starting the process. The problems in Europe also appear to be weighing on the UK economy after manufacturing growth in September hit a 17 month low, coming in at 51.7, though the recent uncertainty created by the Scottish referendum may well have also played a part. It brought the average reading for Q3 to 52.8 raising the prospect that Q3 growth is likely to be below the levels seen in Q1 and Q2. Construction PMI due out later this morning is expected to remain robust for September, coming in at 63.7, down slightly from 64 as residential property remains strong. EURUSD – this week’s low at 1.2570 appears to be holding for now as we look for a move towards the 1.2400 level. 1.2660/70 should now act as resistance for any move lower. Above 1.2670 argues for a rebound towards the 1.2785 level which was the 61.8% retracement of the up move from 1.2045 to 1.3995, and was support on the move lower. GBPUSD – the pound has thus far remained well supported just above the 1.6000 level but appears to be showing signs of sliding back again after slipping below 1.6270 late on Friday. Having lost some of its safe haven allure in the wake of the Scottish referendum it could well revisit the lows this month if we slip below 1.6150. Resistance comes in at 1.6280 and behind that at 1.6420. EURGBP – the 2012 lows at 0.7754 remain the next support as the euro continues to remain weak. Resistance remains at the 0.7875 level, which had shown some support earlier this year. While we remain below this level the bias remains for euro weakness towards levels last seen in October 2008 at 0.7690. USDJPY – the US dollar appears to be finding a few sellers around the 110 level, nonetheless the next target remains the 110.65 level which is the August 2008 highs after this month’s break above the 105.50/60 area. This break continues to look hugely significant but we are looking increasingly overbought and at risk of a pullback. A move below 108.25 could well precipitate a sell off towards 107.00. 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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