While awaiting the first ECB meeting of 2012, investors moved cautiously on Wednesday. The market was in a modestly risk-off tone amid concern over a downgrade of French credit rating and talks over the Greek PSI. The latest Fed Beige Book indicated economic activity in the US expanded at a 'modest to moderate pace' from late November to late December. As shown in the Beige Book prepared by the San Francisco Fed, 7 districts recorded 'modest' while 2 reported 'moderate' growth late November to late December. Consumer spending picked up in most districts. The Beige Book indicated that financial institutions generally showed a slight uptick in loan demand by businesses with improvement in overall credit quality. However, this was overshadowed by the worries over the Eurozone. Wall Street opened lower with the S&P struggling to close flat during the day. DJIA pared losses after the encouraging Beige Book but still ended the day losing -0.1%. In the commodity sector, oil prices declined as the inventory report disappointed. The front-month contracts for WTI and Brent crude fell -1.34% and -0.92% respectively. Gold climbed to 1648, the highest level since December 13, amid Fed Presidents signaled the need of further monetary easing.

Debt problems in peripheral economies in the 17-nation Eurozone have spread to the core since last year. There have been renewed talks about a downgrade for French credit rating. Market worries remained although Fitch said that it expects France would maintain the AAA rating though 2012 unless the crisis in the Eurozone deteriorates dramatically. Indeed, Fitch put France under negative watch last December, indicating a 50% chance of downgrade over the coming 2 years. Fiscal problems in France were not much better than its debt-ridden peripheral neighbors as its debt-to-GDP level will rise to 92% of GDP by 2014.

In Greece, no conclusion was made regarding the PSI. Greek finance minister Evangelos Venizelos said that talks on PSI 'have advanced and are now at a very good point and the deal would insure 'a sustainable public debt in the long run, which will have been reduced by about 100B euro, or 47% of GDP, and will be absolutely sustainable by 2020'. No details have been confirmed so far. The country intended to finalize the deal before it needs to repay 14B euro in bonds in March.

The focus of the day is the ECB meeting. The central bank is expected to leave the main refinancing rate unchanged after lowering it over the past 2 months. However, the easing cycle has not ended in the ECB. Deterioration in the region's economic outlook and moderation in inflation have instead given more room for further monetary accommodation to take place.