The markets were on the defensive today, and the equity markets where not able to hold on to the late day short covering rally from Friday afternoon. The S&P 500 index closed down 9 points to 1057. Again the markets were very concerned about the European fiscal issues which are creating havoc in the European debt markets. Additionally, Investors weighed a report in The Wall Street Journal that Federal Reserve Chairman Ben Bernanke will begin laying the groundwork for credit tightening later in the year, bringing to a close a period of historically low interest rates that have made it easier for ailing banks to book big profits.
The markets had an opportunity to rally as China’s tightening of money market conditions has eased. The PBOC has been injecting extra funds for the last few days. The yield on the benchmark money market rate fell 18 basis points. Expectations for Yuan appreciation have moderated in recent days as well. The implied appreciation of the Yuan on the 12-month non-deliverable forward has eased to 2.3%, with last week’s fall being the largest in a couple of months. Note that Chinese officials have issued a partial ban on new IPOs–specifically targeting listed companies seeking to raise equity to pay down debt or in sectors identified as suffering from excess capacity. This is an important week for Chinese data, which includes exports (trade), inflation (CPI) and new Yuan loans.
The weekend press has been poor for sterling. Two things ail the pound: Politics and economics. The risks of a hung parliament have been highlighted in the latest polls. Under the US presidential system, a divided government is sometimes seen as a positive development in terms of checks and balances. This does not hold in a parliamentary system where a hung parliament spells policy paralysis and confusion. In terms of economics, the disappointment over Q4 GDP continues to linger (and also making this week’s December trade and industrial output data not particularly important). A former IMF official comparing the UK situation to Greece and Spain has weighed on sentiment just as one of the largest bond managers of the world tried to convince others to avoid UK debt. There is one important difference between the UK and euro zone members that is often lost in the polemics. The UK is a currency issuer. Greece and Spain are not. The highlight of the week will be the BOE’s quarterly inflation report due mid-week.