In sharp contrast to their position during the first couple of weeks into January, world stock markets are almost universally lower in the year to date.  Chinese policy tightening, poor Q4 growth in Korea, expectations for only a sluggish recovery in the West and Obama's bank proposals have all put the frighteners on the market.  The overnight session in Asia maintained this theme with the Hang Sang increasing yesterday's heavy falls and the JPY higher across the board.  In Europe, however, tensions have eased.  JPY gains have been pared back, the EUR and the AUD have made some headway vs the USD and sterling has bounced strongly following yesterday's data induced decline.  

Cable hit a session low of USD1.6109 this morning before surging towards 1.6220.  Corporate demand appears to be protecting the 1.6100 level but the incentive for today's move is both speculation that the UK economy is somewhat stronger than implied by yesterday's official Q4 GDP data and hawkish comments from the BoE's Sentance.   Sentance concluded that it may be difficult for the MPC to keep inflation on target given the impact of sterling's depreciation and above-target services inflation.   The rally in sterling has pressured EUR/GBP back below 0.8680.  

EUR/USD has followed the move higher in cable with the EUR being offered some solace from a comment from Fitch that it is a 'bit more confident' on Greece  and on reports that China is a potential buyer for Greek government debt.  While critics of this story raise the point that China already has an interest in the Port of Athens and may not want to increase its holdings in the country, this has been countered by the view that in helping bind together EMU by supporting the Greek government, China may buy some political sway over Brussels.  This story coincides with a report from Professor Roubini warning of a potential break-up of EMU.  While he is not the first US based academic to come to this conclusion and while the economic arguments do have validity, this view perhaps overlooks the fact that EMU has always been more about politics than economics.  It remains too early to speculate about the breakdown of EMU.  That said budget issues within the Eurozone have led to growing fears about sovereign default.   Yesterday's Portuguese budget is still being digested but with the IMF forecasting that the Spanish economy will contract by another 0.6% in 2010, attention is being towards the budget problems of Spain's much larger economy.  This suggests that this morning's respite for the EUR is likely to be short-lived.  

The AUD has followed the EUR higher vs the USD in London hours.  Stronger than expected CPI data overnight (2.1% y/y in Q4), has strengthened the case for a RBA rate cut next week.  That said falling metals prices overnight on the back of concerns of Asian demand going forward have undermined confidence in the AUD, NZD and the CAD.

The FOMC meeting and Obama's State of Union address are the key events of the day.  US new home sales data are also due.
Jane Foley
Research Director