If concerns over the strength of the US recovery were not bad enough the market has now been rattled by increased fears that growth in China may be less rapid than previously expected.  These fears swept across the market following news that the US conference board had revised lower its China index.  Yields on 10 yr treasuries have pushed under the 3% level, 2 yr yields have broken below the their 2009 lows on flight to quality and the yen has managed sharp gains across the board, though there is presently signs of stabilisation vs the USD and the EUR.  This morning's set of poor Japanese economic data increased fears regarding the resilience of the global recovery.

For weeks fears over the ability of some institutions within the European banking sector to find funding have also been undermining confidence in the market.  These concerns increased last week following comments from the Banque de France's Noyer that some banks have started to have funding problems.  Comments from the Spanish Finance Minister Salgado this morning questioning the decisions of the ECB have heightened these concerns.  Salgado was referring to the imminent expiration of the ECB's 12 mth EUR442 bln loans.  She questioned whether the ECB was conscience of the needs of Spain's financial system.  The 12 mth loan was part of the ECB's emergency response to the financial crisis and the ECB has indicated that it will not be replaced.  That said, the ECB has countered that it is providing extra liquidity, though in shorter dated loans.  Uncertainty as to which institutions may be carrying large amounts of bad loans is the reason why Libor has been pushed higher and activity in the interbank market has been strained.  While the EU have tried to counter this suspicion by promising to publish the result of stress tests, the market is fearful that stress tests will force some banks into writing down  losses on non-performing loans.  In this environment, the EUR is set to remain under pressure.  This morning EUR/USD has sunk back below the USD1.2200 level, the next technical target lies around 1.2145.  Further out EUR/USD may see 1.14 and potentially below.  

UK data this morning were mixed.   Mortgage approvals were weaker than expected.  Following on from yesterday's disappointing house market report this is further evidence that the UK's housing market recovery could be slowing down.  Countering the negative implications of these numbers was the stronger number in the BoE's favoured money supply measure.  M4 excluding financial intermediating companies rose 9.2%.  Over the past year or so increases in money supply have been scant suggested that QE has not had a huge impact on the real economy.  Sterling has performed well, albeit in a choppy manner, vs the beleaguered EUR this morning.  Cable has been pressured lower by safe haven USD demand.  

AUD/USD is presently finding some support in the 0.85600 area, following sharp falls that commenced in Asia.   Australia's sizeable exports to China will keep the AUD very tied to expectations regarding the relative strength of China's economy.  Present concerns over the pace of the global recovery could thus ensure the AUD remains under pressure.

US S&P/CaseShiller home prices and consumer confidence data are due this afternoon.  Jane FoleyResearch DirectorFOREX.comjfoley@forex.com+44 207 398 5024