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Financial Focus

EUROPE took a major step towards full fiscal union last night, as every EU member country except the UK and the Czech Republic vowed to cut budget deficits and submit themselves to greater scrutiny from the European Commission. The 25 countries that signed up hope to have a formal pact in place by March, and plan to ratify and implement it in the following months. In an effort to put in place a big enough “firewall” to protect Italy and Spain from bankruptcy, the Council also agreed to bring the establishment of the European Stability Mechanism forward to July – a year earlier than initially planned.

EUROPEAN banks are preparing to tap the European Central Bank’s emergency funding scheme for up to twice as much as the ECB supplied in its debut €489bn auction last month, providing further evidence of the sector’s liquidity squeeze. Several of the Eurozone’s biggest banks have said they could well double, or triple, their request for funds in the ECB’s three-year money auction on February the 29th.

UK CONSUMER morale climbed to its highest in more than half a year in January, as lower energy costs and retailer discounts provided hard-pressed consumers with some relief, at least for now, researchers GfK NOP said this morning. Latest data showed that British inflation fell sharply in December to 4.2% as fuel prices dropped and retailers lured customers with hefty discounts for clothes.

MARKETS:

THE START of the week has seen traders use renewed uncertainty to take profits. Copper was down over 1% to $3.82 a pound on Monday and Brent crude fell 0.4% at $110.97 a barrel, though the price is underpinned by lingering worries about potential supply disruption resulting from Iran’s dispute with the west over Tehran’s nuclear ambitions.

THE ABSENCE of a conclusive Greek debt deal contributed to a sell off in bonds of other heavily indebted European nations, such as Portugal. The spread between Portuguese and German benchmark bond yields during the session rose to a euro-era record, a signal investors believe Lisbon also will have to restructure its debt.

GOLD was not immune from the selling, reflecting a firmer dollar. The bullion was down to $1,729 an ounce and the dollar index, often inversely correlated to market risk appetite, was up 0.3%.

CURRENCIES:

THE DOLLAR weakened against most of its major peers after Greek Prime Minister Lucas Papademos said progress had been made in debt-swap talks with bondholders, sapping demand for a refuge from Europe’s fiscal crisis. The Australian and New Zealand dollars gained as Asian stocks rallied, boosting the allure of higher-yielding currencies. The yen climbed to a three-month high against the dollar, spurring speculation that Japan’s government may take action to curb the currency’s advance.

ENERGY:

OIL rose as investors speculated that fuel demand might climb after industrial output in Japan, the world’s third-largest crude consumer, gained more than forecast. Futures increased as much as 0.8% in New York after slipping yesterday to the lowest price in more than a week. Japanese factory production climbed 4% last month, the trade ministry said today in Tokyo, the most in seven months.

COMMODITIES:

RECORD industrial demand for silver and resurging investor interest is diminishing a supply surplus, driving the metal used in everything from solar panels to batteries into its best start to a year in almost three decades. The metal rallied 23% since closing at an 11-month low in December, entering a bull market on mounting confidence that another global recession will be avoided even as the World Bank and International Monetary Fund cut their growth forecasts. Prices had plunged 44% in eight months, making it the most volatile of any metal tracked by Bloomberg.

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