Markets volatile at the end of the week

The European Central Bank resisted pressure on Thursday to commit to a major bond-buying program to contain the euro zone debt crisis. ECB President Jean-Claude Trichet said the bank had decided at its monthly policy meeting to keep interest rates on hold and it extended its liquidity safety net to support vulnerable euro zone banks. He made no mention of increasing the ECB's government bond buying program, despite calls to do so after an 85 billion euro ($110.7 billion) EU-IMF rescue of Ireland failed to dispel fears that Portugal or Spain may need a bailout with Italy and Belgium in the unenviable position of who's next? During yesterday's news conference Trichet issued the following warning: "I say we are constantly alert. We are constantly looking at the situation of the markets." But referring to a bond-buying policy that the ECB started after Greece was bailed out in May, he said: "The Securities Market Program (SMP) is ongoing, I repeat -- ongoing ... I won't comment on the observations of market participants."

Suggestions before Thursday's meeting that the ECB could agree new anti-crisis measures had helped the euro stabilise and lifted stock markets, despite lingering concerns about Spain and Portugal. Adding to those concerns, Standard & Poor's warned late on Thursday that it may downgrade Greece's BB-plus credit rating in three months if it becomes clear that Europe's new mechanism to stabilise the debt crisis would favour public creditors to the detriment of private bond holders.

The failure to announce any major new action worried some economic analysts. But others' disappointment was tempered by the reports of ECB purchases of Portuguese and Irish bonds, which caused a drop in the premium that investors demand to buy these countries' debt over German benchmarks. The euro will continue to fall throughout 2011 according to a Reuters Poll announced yesterday. According to 60 strategists the battered euro will fail in the coming year to recoup its recent sharp losses as the debt crisis in the bloc rumbles on and fears over the economic stability of the multi-nation currency weighs on the mind of analysts.

Sterling slipped against a firmer euro on Thursday as traders cited the ECB buying Portuguese and Irish debt, helping to calm jitters over the euro zone periphery and lend support the ailing single currency. Traders said sterling price action continued to be driven by euro zone sovereign risk sentiment, but could easily have a reversal in fortunes if the sentiment towards the euro changes in light of numerous countries in the euro zone seemingly queuing up, cap in hand awaiting help from the IMF.

The premium investors demand to buy Portuguese and Irish debt over German benchmarks did fall Thursday with traders saying the European Central Bank had been buying the two countries' bonds.ECB President Jean-Claude Trichet earlier gave no indication the central bank was considering escalating its sovereign bond buying scheme, which initially dented the euro.

"The ECB have reportedly been buying Portuguese debt and the spreads have come in, which is why the euro has rallied against sterling and other currencies," said Adrian Schmidt, currency strategist at Lloyds Banking Group. The euro traded at 84.70 pence, close to a session high and up around 0.7 percent on the day. It had fallen to a two-month low on Wednesday of 83.34 as the euro came under broad selling pressure. Versus the dollar sterling traded down around 0.4 percent at $1.5565, having slipped to a two-month low of $1.5485 on Tuesday, but traders said focus was very much on the euro. GBP against any other currency other than euro takes a slight backseat so the side show that is GBP-USD should look to be fairly well supported around the $1.55 level, a break below this should trigger further weakness however.

Activity growth in Britain's construction sector unexpectedly picked up in November, data showed on Thursday, but it stayed near an eight-month low and may not give much of a boost to economic growth this quarter. The Markit/Chartered Institute of Purchasing and Supply construction PMI rose to 51.8 in November from 51.6 in October, confounding forecasts for a fall to 51.0. A survey on Wednesday showed British manufacturing activity accelerated to a 16-year high last month with traders now watching for Friday's release of UK November services PMI data. A Reuters poll forecasts a slight decrease to 53.0 from the previous month's reading of 53.2.

The spotlight that has been shining brightly over the Eurozone this week will shift onto the US this afternoon as the release of November's non-farm payrolls report is announced. The report is forecast to show that payroll was up 140'000 over the month, however this is not expected to make a real difference to the overall unemployment rate which is expected to remain unchanged at 9.6%. After racking up strong earnings growth in 2010, major U.S. manufacturers are expect to set the stage for a slower-paced 2011 when they meet with analysts and investors to lay out their expectations for the coming year.

Among others, General Electric, United Technologies and 3M are all set to provide 2011 forecasts shortly. Profit margins across the sector swelled this year as companies that cut costs to the bone during the brutal recession experienced a rebound in sales that helped the Standard & Poor's capital goods industry index to rise about 14%, more than twice the gains of the broader US Stock market. Analysts expect 2011 profits to rise next year, but not at the same pace as 2010. It is likely that the forecast for the dollar will be negative as the slow recovery and difficult sets of fundamental undermine the currency during these difficult times.