Monday 23/01/2012 2PM GMT

European stocks hit their highest level since early August on Monday, with euro zone banks gaining sharply following a report that France and Germany were calling for a relaxation of global bank capital rules to prevent a credit crunch so there's a crisis in the global economy and stocks are on the up but not for much longer and the Euro rally also looks close to an end.

The Euro rally as write is at 1.30 but this is really short covering as we have a record net short speculative position as we noted in our reports at the weekend but the rally looks set to stall here and the dollar will regain its upside momentum.

The risk rally has run most of the currencies we track to overbought levels and its now time to be alert to sell them and ,load up on dollar longs.

Position Summary

AD: We have come up to get just above 1.050 and we will take a dip back below this level to get short on falling momentum and look for a test of the 1.030 mid Bollinger band support. Our momentum indicators are at a bullish extreme and there is little upside left, without a pullback.

BP: The British Pound has tested 1.56 today and we think this level will hold look to sell weakness and look for a move to test 1.55 and if this gives way, the bears will be back in control.

CD: Were at 99.00 now and this is the level to sell into with stop behind par – were overbought and expect a downside break to target 97.00 tomorrow.

EC: Were up above 1.30 just and hit a high of 1.340. We have taken out and banked our shorts from 1.33 for a profit but we don't expect to be out for long and will look to sell weakness below 1.30 AM and have a target initially on the downside of 1.29 and if we move below this level the top will be completed – we will pick the top AM and load up below 1.29.

JY: After banking a small swing trade profit last wee, we remain flat and waiting to take a dollar long swing trade on move above 77.00 supported by momentum for a run at 77.50.

Euro Zone - Greece A Deal But More Problems Ahead

French Finance Minister Francois Baroin said that an agreement with private-sector investors about resolving Greece's near debt crisis was taking shape. German Finance Minister Wolfgang Schaeuble, added that he wanted a second bailout program in place for March.

Greece needs additional aid to be able to avoid a default. If it cannot agree a deal, Athens will not be able to pay back 14.5 billion euros in maturing bonds in March - triggering a default. We think that some agreement will be made but this is by no means the end of the problem for Greece or Euro zone.  

IMF chief Christine Lagarde urged European governments to increase their financial firewall to prevent Greece's troubles taking down other bigger countries such as Italy and Spain. She also called on European leaders to add to the "fiscal compact" with some form of financial risk-sharing, mentioning euro zone bonds or bills, or a debt redemption fund as the way forward. Sensible advice but of course Germany doesn't agree:

German chancellor Merkel told a news conference that it was not the time to look an increase in the euro zone's bailout funds -- the European Financial Stability Facility (EFSF) and its successor, the 500 billion euro European Stability Mechanism (ESM).

"I don't think it is right to do one new thing then do another, let's get the ESM working," Merkel said, that Germany was prepared to accelerate the flow of capital into the ESM ahead of its planned introduction in mid-2012.

The Germans don't want to increase bailout funds but it's clear the funds available are not enough and the problem is the market lacks confidence in Euro zone policy. Greece may be propped up short term but Italy and Spain will continue to struggle and economic growth is slowing and will slow further. Austerity at a time when growth is slowing in many nations will slow growth even more. Euro zone is already in recession and the recession looks set to get worse and continue for many years to come.

Finally, the ECB is printing money to give banks liquidity and this is quantitative easing in all but name and printing money leads to a weaker currency. The Euro is having a short covering rally but the rally is on borrowed time; we would expect to see it back at the lows shortly and longer term, see it below 1.20 or even as low as par.

India – Inflationary Pressure and Slowing Growth

While we have trouble in Euro zone there is a general slow up coming in the world economy which investors looking at risk assets are failing to see. We have in previous reports discussed the possibility of a hard landing in China and India, another heavyweight of he East is also in big trouble.

India's central bank said the growth outlook and business climate have weakened but warned of upward risks to inflation, a day before it is widely expected to keep interest rates on hold. The Reserve Bank of India also gave little indication that it might cut the cash reserve ratio (CRR) to help boost business activity.

"The critical factors in rate actions ahead will be core inflation and exchange rate pass-through," the RBI said.

Core inflation has been at or above 7 percent for 11 consecutive months, compared to its long-term trend of about 4 percent, the RBI said. Adding to inflation, the rupee fell 16 percent against the dollar in 2011, boosting the cost of imports such as oil.

The RBI said it expected growth to improve in the fiscal year that starts in April, but that weak investment and external demand would hold back economic growth.

"The growth outlook has weakened as a result of adverse global and domestic factors," it

India's economy is expected to to grow by about 7 percent in the fiscal year that ends in March, far slower than the previous year's 8.5 percent and its going to get slower.

Dollar Dip is a Buying Opportunity

The stock brokers and banks have got their sunglasses on and see no real problems in the globla economy which can't be overcome but they can enjoy the stock rally while they can because we have huge problems ahead and this makes the dollar a buy on the dips, as global growth falls and the Euro zone fiscal crisis continues.

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