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WEEK IN FOCUS - 16/04/12-20/04/12

This week looks to be a fairly busy one, with the spotlight falling back on the battle of the European debt crisis, and whether the IMF is prepared to help in combat by boosting their crisis-fighting war chest. Boosting of the IMF lending capacity has been a hot topic since Europe agreed to raise the combined ESM/EFSF ceiling to EUR 700bln, leaving many questioning the effective size and impact of this new firepower. Since this decision the pressure has fallen on to the IMF to enhance their arsenal, which will be a key topic of discussion at this week's summit of G20 leaders, although there remain a few sticking points. Firstly any increase would bring demands from emerging nations for greater voting rights, and secondly the US has repeatedly opposed any fund increases, which considering they are the largest shareholder could bring some friction at the meeting and within the coming months. Since the beginning of the year the IMF has showed a willingness to increase its lending capacity, however G20 officials recently noted that the IMF is to lower its funds target, with IMF resources looking to be increased by USD 400-500bln, not the USD 600bln originally suggested.

With all this focus on the effectiveness of a fund increase to treat the Eurozone debt crisis, anxiety remains over several European countries, with Spain stealing the limelight off Greece as they come to the market this week with a double offering of bills and bonds at a time when borrowing costs have been creeping higher. The uncertainty over the Spanish financial system was again shaken somewhat by reports last week that the surge in Spanish banks' ECB borrowing was confirmation that banks in Spain had drawn heavily on the ECB's second offer of LTRO, suggesting that although most of the cash is being used to refinance maturing bank debt, a decent chunk of it has and will be used to fund the Spanish sovereign.

Also in Europe this week sees the starting gun fired to the French presidential race, which many expect to see current president Sarkozy and centre left Francois Hollande go through to compete in round two. Hollande currently leads the way in the polls, with around 55% to his name, but if there is no outright majority on Sunday we will see round two, interesting to be held on the same day as the Greek parliamentary elections on May 6th. Finally in Europe it is worth noting that the Troika will begin their sixth review of the Irish program today, lasting two weeks, although the Irish Independent reported this weekend that the EU-IMF taskforce may cancel their press conference to avoid answering any unnerving questions on the fiscal treaty referendum, which is scheduled to take place at the end of May.

Although a lot of focus will be on Europe this week, the US will also steal a chunk of the headlines as corporate earnings season will be well underway following its kick-start by Alcoa last week. This week sees the financial sector in the frame, with them reporting for the first time since the Federal Reserve stress test results showed 4 of the 19 banks failing to meet requirements. Citigroup was one of the surprises from the stress tests, which showed the company's plan to return capital fail to pass, although the company said that they didn't actually fail the stress tests and "that Citi would have a 5.9% tier 1 common capital ratio in the severe stress scenario without the proposed capital actions". They report on Monday, with Goldman Sachs on Tuesday, and Bank of America on Thursday alongside Morgan Stanley, Capital One and Microsoft. Results have been relatively strong so far, with JP Morgan smashing street estimates on Friday, and Google somewhat surprising analysts by proposing a two for one stock split and approved stock dividend proposal.

This week is also fairly heavy in economic data too. Monday sees US retail sales for March, which considering the relatively strong same-store sales we've seen recently could lift results. The UK CPI number due out on Tuesday could also bring attention, particularly due to the release of the BoE minutes for their April meeting due the following day. With last month's more dovish surprise, which showed a vote count of 7-2, this month's will be an interesting insight into the MPC's view on further QE given recent downside risks to GDP and a series of mixed data. The German IFO due Friday should show a relatively stable result as Germany maintains its position as one of the more robust nations in Europe, despite adverse effects from its Southern neighbours. Finally one more point of note will be the Riksbank rate decision, with mixed expectations of either a cut or no change to their 1.5% rate. Inflation did fall below the banks forecast at the beginning of the year and GDP was slightly lower than expected, but recent mixed data which could be interpreted either way.