US equities were up 1% yesterday, and the optimism carried through into Asian trading with the Nikkei climbing 0.73%. The Fed's Beige book contained little to work with and reinstated the obvious line Economic activity continued to expand moderately from November through December, and Lending activity remained stable across most Districts. Credit quality has been steady to improving. Overall there was nothing to suggest any shift one way or another in the Fed's extreme monetary policy.

The last 24 hours have been defined by very choppy and divergent trading as news from the Eurozone was thoroughly analyzed. The much anticipated Portugal issuance went off without a hitch and ended up with an arguably encouraging result. While yields remained elevated and Bid-to-Cover ratio was decent, the Portuguese Finance Minister stated that 80% of the demand came from foreign sources. Given the recent comments from Chinese officials, the logical conclusion is that China had followed words with actions. The possible show of support from China was a strong statement and one that cannot be ignored by the market. Indeed Chinese officials followed up the auction results with comments that they were interested in further Eurozone sovereign bonds and EFSF bonds but would have limits.

At the time of writing rumors abound that today's Spanish auction saw strong domestic demand - which is another encouraging sign for nervous EU bond investors. More good omens for EU risk were the news, comments, and innuendos that the EFSF might be expanded or changed to allow peripheral bond purchases. The European Commission's Barroso said changes could come as early as February. There was also a Bloomberg story which cited an unnamed source with direct knowledge of the talks that opening the EFSF to Greek bonds might be discussed as early as the next Ecofin meeting. EURUSD was support by growing confidence that, for now, appropriate steps have been taken to control the spiraling sovereign crisis. Peripheral bond yields and CDS dropped almost across the board. We suspect that further EUR gains should be expected as we move closer to a short-term solution (albeit a temporary patch).

Coming up later today will be the non-event BoE and ECB rate decisions (see Central Bank Preview). In the UK, no change will mean no statement and nothing to move forward on. However, with inflation failing to drop as the MPC had forecasted, the central bank will eventually need to make difficult decisions. As for the ECB our attention will be focused on the press conference. We expect the press to ask some direct questions regarding the recent sovereign purchases and prospects for further activity in these markets, as well as Trichet's thoughts on recent elevated inflation data. Most suspect Trichet will evade most pitfalls in answering such questions, but there is still a chance this turns contentious.
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Today's Key Issues (time in GMT):
08:30 SEK CPI headline rate, % m/m (y/y) Dec 0.9 (2.5) exp
09:30 GBP Industrial output, % m/m (y/y) Nov 0.5 (3.3) exp
09:30 GBP Manufacturing output, % m/m (y/y) Nov 04 (5.3) exp
12:00 GBP Bank of England, Bank rate, % Jan 0.5 0.5 0.5 0.5 0.5
12:00 GBP Bank of England, QE decision, £ bn Jan 200 200 200 200 200
12:45 EUR ECB interest rate announcement, % Jan 1.00 1.00 1.00 1.00 1.00
13:30 EUR ECB press conference
14:00 EUR German Finance Minister Schaeuble speaks
13:30 USD PPI, % m/m (y/y) Dec 0.8 (3.8) exp
13:30 USD Core PPI, % m/m (y/y) Dec 0.2 (1.4) exp
13:30 USD Trade balance, $ bn Nov -40.9 exp
13:30 USD Initial jobless claims, thous (4wk mvg avg) 08-Jan 405 (406) exp
19:00 EUR ECB Executive Board Member Stark speaks
23:50 Corporate goods price index, % y/y Dec 1.0 exp