News and Events:

- Overnight: The FOMC minutes acknowledged the recent improvement in the economic outlook, but revealed some concern about vulnerability to domestic demand. The FOMC discussed also about "tapering" the purchase of agency debt and MBS to minimize any market disruptions. Still, they explicitly decided that "neither expansion nor contraction of its program of asset purchases was warranted at this time."

- ECB: The new ECB Staff forecasts, likely upgrading the GDP outlook, will provide ground to assess the recent improvement in data and gauge the effectiveness of the monetary policy transmission to date. The press conference should reflect some cautious optimism but yet point that exit strategies from the ongoing stimulus currently are not on the ECB’s radar screen.

- US: We expect the Non-manufacturing ISM to increase in August to 48, from 46.4 in July. If sustained, the improvement would be encouraging as the sector is related mostly to internal demand.

- UK: August Services PMI should edge up to 53.5 (vs. 53.2 in July), underpinning the fact that a recovery in the services sector is taking increasingly hold against a still subdued picture for industrial activity.

- SW: The Riksbank will leave the repo rate at 0.25%. Most attention will be on any discussion on the likely consequences to have a negative Deposit Rate (which stands 50 bp below the repo, i.e. at -0.25%).

FI/FX Strategy:

- Mkt recap/O’night: Bonds kept rallying yesterday, supported by another weak session for stocks. In the EGB market, safe-haven buying favored Bunds at the expense of periphery. Bonds corrected a bit overnigth.

- FI View: At 1.17%, the 2Y Bund is at the lowest yield since the emergence of the green shoots in Q2. With business surveys showing signs of recovery, we regard such a level as too low. However, as pessimism still affects investors’ mood, a sell-off is unlikely in the near term (unless Trichet should be particularly upbeat today).

- Primary market: Today, activity will be quite intense in the eurozone with France and Spain expected to issue a total of around EUR 11bn at the short and medium tenors. After the recent widening of spreads vs. Germany, we expect yield-hunting to favor demand at both auctions.

- FX View: Activity on the currencies is still subdued, with fears of a soft US job report tomorrow after the bleak ADP data, the G-20 meeting in London this weekend and the US Labor Day holiday on Monday reducing incentives to open fresh positions. Tactical trading is likely today too.

- EUR: Better ECB near-term growth forecasts should discourage euro bears further, keeping EUR-USD away from the critical 1.4175 area. Some help should also come from the healthy services PMI, but we doubt that this will be enough to induce a sharp rally much above 1.4350.

- GBP: A firm UK services PMI should offer cable a cushion today and limit new heavy selling pressures below 1.62. We remain bullish here, after entering a plain vanilla cable call at 1.67 expiring in December and we also recommend selling EUR-GBP above 0.88 on a daily basis.

- SEK: EUR-SEK may rise towards 10.45 in the near term, if the Riksbank also confirms today a more cautious approach on rates than the Norges Bank. Indeed, we still bet on a firmer krona in the medium term and thus we entered a EUR-SEK plain vanilla put at 9.80 expiring in March 2010.