• An impressive firewall for the eurozone is increasingly shaping up, thus further indicating – and now credibly so – the authorities' determination to avoid an EMU breakup. Following last week's ECB OMT initiative, yesterday's ESM verdict of the German Constitutional Court paved the way for a final ratification of the treaty. Barroso's specified blueprint for a deeper economic, monetary & banking union and the pro-euro parties victory in Dutch elections added to the confidence.
  • Nevertheless, numerous challenges remain. One is to preserve the reform process even if there is a change in government, as Italy will go to the polls next spring. The approval of a new electoral law in the coming weeks will be crucial to shaping parties’ alliance strategies. But in any case, political risk has been significantly reduced by the possibility that PM Monti might sign a Memorandum of Understanding if needed – as we argue in our first focus piece.
  • Market sentiment is currently also profiting from additional monetary accommodation of the Fed (QE3 & forward guidance) as well as of other central banks which should lend a helping hand to the still stuttering global recovery. Weak economic figures over the summer weeks prompted us to fine-tune our short-term projections, but without changing our constructive basic view. We will release final numbers early next week in our Monthly Chartbook.
  • As the BoE already stepped-up its asset purchase program in early July, next week's minutes should reveal that the MPC feels comfortable with its current policy stance and should remain in a wait-and-see mode. However, we think that the bar for further easing will be relatively low, should the economic outlook show a renewed deterioration.