After a marathon session running into the early morning hours England blocked Sarkozy-Merkel’s proposal for a new and revised EU-treaty giving the European Commission more decision power on the cost of member states. Premier Cameron made it clear the proposed revisions did not give England the necessary guarantees and especially not for its financial services industry.

Cameron stressed that England is not a part of the Euro-zone, and he sees the inflexibility of the EURO as mainly responsible for the financial crisis. He offers England’s support, but obviously see the EURO-crisis as primarily a problem for continental Europe.

An intergovernmental agreement between the 17 EURO-members seem in this situation to be the most likely outcome. To avoid the impression that ECB (European Central Bank) is acting as a lender of last resort, 200 Billion Euros is going to be transferred to the International Monetary Fund (IMF) to create an extra firewall to bail out EURO-zone countries like Spain and Italy fighting with big budget deficits.

European leaders tried after the meeting to give this outcome towards a two-tier Europe a positive spin. Markets have reacted cautiously. The steep falls in futures seen through the night seem to have stopped for now. Euro/USD is flat at 1.3325 while YEN continues to be strengthened versus USD at 77,59.

Oil prices have fallen more than two dollars on the prospects of increased uncertainty and slower economic growth. Last quarter result for industrial output in China shows that the dramatic growth seen for many years have come to a halt. Gold prices which reached 1750 inter day yesterday, have been in free fall at present trading at 1708.

EURO remained firm against the dollar (1.3426) in Wednesday’s morning trade in Asia as investors trimmed their holding of positions considering whether to bet on a further decline in the common currency ahead of crucial EU-summit on Thursday and Wednesday and European Central Bank (ECB) meeting on Thursday.

Market participants are closely watching any developments and new moves with eyes mainly on the compromise package worked out between Merkel and Sarkozy indicating a rewriting of the European Treaty. The rating agency Standard and Poor shocked markets yesterday with news that it intends to downgrade all members of the EURO-zone.

While most concentration so far has been on Germany and France, Premier Cameron yesterday stated that he shall veto any revision of the EU-treaty not in accordance with British interest. This tells that the indicated Merkel/Sarkozy proposal by far is a foregone conclusion. Any transfer of power and authority to Brussels shall most likely be met with fierce resistance from more nationalistic member states.

Australian GDP grew 1,0 % from previous quarter and climbed 2,5 % from a year earlier. 0,8 was expected. The better than expected figures supported risk sentiment and benefited higher yield currencies as the Euro.

A senior dealer at Barclays Bank in Tokyo claimed many investors seem to cover Euro/USD short positions and that the ground appears to be firm in the 1,33 segment. In short term there is an upward bias versus dollar. Euro/USD will likely continue to be volatile driven by any headlines prior to the EU-summit.

Oil prices have stabilized over the last 24 hours. Trend towards a stronger Yen continues; USD/JPY at 77,72. Gold is trading at 1729 up from yesterday’s low at 1703.

S&P plays politics prior to EU-summit;

EURO countries

downgraded

On the eve of the EU summit Thursday and Friday the US rating agency Standard and Poor has created new panic in the markets by downgrading all members of the EURO including Germany and France. Germany is loosing its triple A rating and France is degraded to AA. All EURO-countries are set under immediate economic surveillance. The S&P decision would put increased pressure on banks and bigger companies also threatened by downgrading.

The news came just hours after Sarkozy and Merkel in a joint press conference announced agreement on how to tackle the Euro-zone crisis. France and Germany are proposing a revision of the European Treaty to be ratified by member states by March 2012. A part of the package is introduction of stronger budget discipline whereby immediate sanctions are going to be taken against member countries not following its obligations. Monthly EU- meetings at top level is also included and a more effective mechanism for the rescue of troubled sovereign economies.

The package was well received by the market. Europe and the US rose till S&P spoiled the party in late US-trading. After listing impressing gains over the last weeks the Asian exchanges are steeply down. Oil prices are falling as precious metals. Gold is falling 40 dollar from inter day high on yesterday.

The downgrading has put the Euro under increased pressure. Euro/USD is 1.3377. Speculators are watching the EURO drama, and it is expected that the EURO shall be under constant attacks for weeks and months to come.

Japanese Yen is strengthened and trading at 77,76 against the dollar.