Italian PM under pressure as Slovakia agrees to bailout package at second attempt

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The focus of attention in Europe yesterday shifted away from Slovakia and onto Italy, which scraped through its four bond auctions but the markets remain on tenterhooks with PM Berlusconi facing a vote of confidence later today on how he has handled the economic crisis and his personal affairs.

There has also been little market reaction to the news that Slovakia, at its second attempt, has ratified the up-scaled Eurozone bailout fund. With all this going on it is somewhat of a surprise that Sterling has traded in a relatively tight range between £/€ 1.15 and £/€ 1.14 for most of this week.

Yesterday's data revealed the UK's trade deficit fell to £1.9 billion in August, according to the Office of National Statistics data published yesterday, prompting the government to argue that the British economy is finally rebalancing. The overall fall in the trade deficit was driven by a 1.3% increase in the volume of exports to a record high of £25.5 billion.

In the US the trade deficit stabilized at $45.6 billion in August while the initial jobless claims stabilized but remained elevated above 400,000.

From Australia yesterday, there were 20,400 jobs added to the economy which helped the unemployment rate fall to 5.2% from 5.3%. Pressure had been mounting on the Reserve Bank of Australia to deliver an interest rate cut given moderating inflation and global uncertainties, but this positive employment release should all but remove the possibility of a 2011 reduction in the interest rate.

Economic events today focus on events in Europe (for a change) that include a confidence vote on Italian PM Berlusconi's government and meetings of the G20 finance ministers and central bankers. The officials are likely to underline the downside risks to global growth and the need for rapid decisions on a comprehensive crisis resolution plan in Europe. According to the Canadian Finance Minister they will discuss the French-German plan for recapitalizing banks and whether the Eurozone bailout facilities are big enough. Oh, and how to deal with Greece.

On the data front, we have the final Eurozone September CPI and the August trade figures on the menu. The CPI surprised to the upside in the preliminary estimate at 3.0% so should this be confirmed, it will be well above the ECB's target of 2%.

In the US, the data is focused on the consumer. September retail sales are expected to be 0.7% while the preliminary October University of Michigan consumer confidence survey is expected to show another slight increase in the headline index, to 60.2 from 59.4 in September. Have a good weekend.