Today stock markets were generally higher, and risk assets were finding buyers at better prices almost around the world, as the yield of sovereign CDS of the Eurozone came down and the Euro appreciated against the USD, which was weaker against most currencies. The most obvious, and strongest reason for today's move is profit taking before tomorrow's ECB meeting where it is being anticipated by the markets that the central bank will announce an extension of its bond purchasing program in order to support the troubled regions of the union. Traders report further that the recent rally in sovereign debt has been fuelled by ECB action in the bond market yesterday, where the bank purchased some Belgian, Italian, and Spanish paper, and continued to do so today. Sentiment was also boosted, albeit slightly, by some new comments from the Spanish government about plans cut costs over the next few years.

In Germany voices are being raised on the possibility of a Euro breakdown. Peter Bofinger, one of the German wise-men who we used to hear from frequently during the time of sharp Euro rallies before 2009, is reported to have invited Germans to consider if they would like "to continue to have the Euro or not", adding further that a decision must be made about whether the project is worth standing up for it. Mr. Bofinger is well-known as a supporter of the Euro, but he is also remembered as an alarmist from the days when Euro was reaching 1.55s, so while his comments are significant, they are perhaps not as worrisome as they would be if they were coming from the mouth of another, less vocal German.

Meanwhile, the ECB is likely to intervene in the sovereign debt market eventually if the situation continues to deteriorate into the next year, but, as Divyang Shah of Thomsonreuters notes, its flexbility willingness to intervene are being constrained by political and legal factors which will probably prevent it from taking drastic action until everyone is running for the exits, and the survival of the Euro is in immediate danger.

The ECB, under the rigid (but some would say principled) leadership of JC Trichet, does not want to appear to be rewarding fiscal irresponsibility, or monetizing government debt, or jeopardizing its own goal of controlling inflation, and this stance results in some willingness to let rates rise and liquidity evaporate in the periphery. Certainly, there is justification to the bank's current position from the point of view of long-term stability and credibility. But, if, as we believe, the integrity of the Eurozone is being imperilled by the recent market events, it is possible that the long-term benefits of the central bank's actions may not realized as the outcome of short-term events place the whole Eurozone on a different track that invalidates the vision of the Governing Council. We do not claim to foresee the exact nature of these possible short-term events, but they could stretch from a default, or a withdrawal from the Eurozone by one of the troubled nations, to an electoral revolt at the ballot box in one of the core economies, and the fall of some government in the region. There are further possibilities of contagion outside the Eurozone, as the former communist nations to the east are always at risk of investor boycott if the market decides, for whatever reason, that the era of bailouts is over. The region has no shortage of over-stretched borrowers with large fiscal or current account deficits, and even the seemingly resilient Turkey to the southeast could be subject to huge fluctuations if investor sentiment on the periphery were to justify a general speculative move against the region. Much is made of the CDS, but so far movements in bond markets have been tame, which is we haven't seen contagion in this secondary regions. All these risks would make one assume that if the ECB will indeed bail anyone out, the earlier it is done, the cheaper, and the easier it will be. The bank concerns itself with details and pursues a kind of rigid perfectionism towards policy which seems to disregard short-term risks, but this approach is risking the survival of the Euro if it is maintained without alteration in the coming months.

November Manufacturing PMIs released today in the Eurozone showed a generally strong performance in the region, but we note that Spain's PMI retreated to 50, after coming at 51.2 in the previous month, and the country's economy provided the weakest numbers for the same period.

Vietnam's troubles have no end

The Vietnamese Prime Minister is reported to have ordered his cabinet to apply price controls on consumer goods and commodities as the country faces a currency crisis following worries about the size of its FX reserves. Vietnamese have been reported to be hoarding dollars for much of this year on the back of a widening current account deficit, and rising inflation. The government devalued the currency earlier in August, but but as confusion on what it plans to do with the exchange rate prevails, the national curreny, dong, has come under strong pressure. Vietnam has been dealing with high inflation since the earlier phases of the global crisis in 2008. The exchange reserves of the country are reported at about $10 billion, down from a peak of $23 billion.

China PMI rises to 55.2

China's official manufacturing PMI rose to 55.2 in November from 54.7 previously, while the HSBC China PMI rose to 55.3, reaching the highest level since March. Growth in the manufacturing sector is robust, and for now, with the government not willing to adapt an agressive revaluation plan, the strong performance may remain in place for while. This rosy outlook is tempered by price pressures, with the PMI prices-paid index reaching 73.5 from 69.9 in the same period. The PBOC is likely to adopt aggressive measures to combat inflation in the next few months, after raising rates for the first time in three years in October.

The central parity rate for the USDCNY was slightly higher today at 6.6786 vs. yesterday's 6.6762.

Bourses and the FX market have been performing well on the expectation of ECB action to be announced soon, but volumes in the CDS market are reported to be small, so today's movements are probably the calm before the storm, so to speak, and the mood can quickly reverse if the ECB fails to deliver tomorrow. We expect gold to go lower if the ECB Governor disappoints tomorrow. Fortunately, all that we need to do is being patient and keeping an eye on J-C Trichet when he makes his comments tomorrow.