We finally got US stocks rallying into the close on Friday, but a near 10% decline overnight in China, caused by regulators curbing margin lending, will be a weight on equity markets today. Still the bias should be upwards for global equities as the market seems to be anticipating QE in the Eurozone. If you don’t believe me, take a look at the DAX, it’s now at record highs, and looks primed to continue rallying. With regards to the United States, the consumer optimism data was fantastic, and may have influenced the price action on Friday, and inflation slightly softer than expected probably helped. A combination of factors good enough for participants to overlook the softer than expected manufacturing and industrial production data which was slightly disappointing. What a strange world we live in though… the shenanigans of the SNB earlier in the week, Japanese bond yields collapsing to near non-existence, oil prices as low as they have been in years, gold up over 10% since the beginning of December, the likelihood of extraordinary measures to be taken in Europe it’s tough to find alternatives to owning equities at the moment. Regarding my comment about Japanese bonds.. I really kid you not, here’s the data:
• Japanese 2yr bonds @ -0.04%
• Japanese 5yr bonds @ 0.00%
• Japanese 10yr bonds @ 0.19%
… remember that this is a country with one of the worst demographics in the world. More adult diapers are purchased there than baby ones. It must be horrific being a pensioner there right now!

Today is Martin Luther King Day in the United States, so there’s likely to be less activity in markets, and when you consider that there’s very little macro data being published as well, this has the potential to be a fairly quiet start to the week.

In the short term the recent, primarily SNB inspired, pressure on the euro might be due a pause, the currency looks oversold versus both the US dollar and the pound sterling. However as I mentioned last week, we have now gone through levels in EUR/GBP which expose the single currency to the potential for significant further losses, and if you didn’t already know it from our comments we remain extremely bearish on the euro versus the US dollar. I could easily see EUR/USD recovering to 1.20, but the path of least resistance is very much to the downside.

Observing commodities, copper and oil have both mounted recoveries of some sort, we will have to monitor the price action this week to get a sense of how sustainable these bounces are. It does appear to have done one thing in the short term… provide some breathing space for beleaguered emerging market currencies. How long this can last is open to question, as the markets are still not pricing in any interest rate hikes in the United States, certainly not for anytime in the first half of this year. As I said earlier in this blog, it looks like a quiet day ahead, but my bias is towards a euro recovery today.

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