There is very little response from global short ends to Fed chairman Bernanke's prepared speech addressing the ultimate withdrawal of abundant liquidity in U.S. markets. The address appears to have dented investor confidence in the stock market, where losses accelerated after getting off to a weak start on account of a wider than predicted trade deficit in December. The reference by Mr. Bernanke to raising the discount rate has possibly rattled some nerves, although investors are not revising their forecasts for when short-term interest will rise. The discount rate applied to funds banks hold at the central bank might supersede the use of the short term fed funds rate. In so doing the Fed would mop up liquidity steering it away from households and businesses and keep funds tied up at the Fed.

Eurodollar futures - Eurodollar futures have reversed an earlier positive tone and are now down by two ticks across the maturity spectrum. Meanwhile the March 10-year note future is moving towards the upper end of the daily range at 118-11leaving the yields at 3.62%. 

The wider trade deficit at $40 billion doesn't really sit hand-in-hand with a rebound in fourth quarter GDP and the sense among investors appears to be one of potentially weaker growth ahead. Ahead of U.S. 

markets opening, trade data from China smacked of an undershoot for January growth as its exports rose 21% year-over-year at a time when economists were expecting 28% growth.

European short futures - German bunds are under pressure Wednesday as it appears some rescue plan is likely to emerge from Thursday's EU summit. The plan boosted investor sentiment on Tuesday and although no one knows what it is, its extent nor conditions, suggestions from various German officials seem to leave European investors with little doubt that some form of accomplishment will appear ahead of the weekend.

The European short end is marginally higher with euribor prices up a tick, while the more dramatic impact is apparent in the bund market. 

Investors have embraced the safety and stability of German government paper. March bunds have dipped 37 ticks to 123.61 in later afternoon trading sending yields higher.

British interest rate futures - The quarterly inflation report stirred quite a response in short sterling futures, which were five ticks lower ahead of the report. The dovish tone to the report subsequently sent prices sharply higher by around eight points into positive territory on the session. The Bank practically ruled out any changes to interest rates for another year. It said that if it adjusted interest rates in line with the market's current prediction embedded in futures prices, inflation would undershoot the target inflation range. March gilt futures rallied 34 ticks to 115.75.

Australian rate futures - Aussie bills fell sending implied yields four ticks higher after a Chinese trade report showed a doubling in the volume of Australian exports to the Chinese nation. Sentiment data dipped for February, which is unsurprising given the timing of the survey. Mortgage rates were higher throughout January and a second half decline for stocks clearly rattled investors' nerves.

Canada's 90-day BA's -Canadian bill prices are pacing declines in Eurodollars and stand easier by three ticks in mid-morning trade.

Japan -Yields at the 10-year continued to decline to 1.31% on Wednesday as the March JGB future built on prior gains to close up 13 ticks at 139.46. Machine tool orders gained 20% on the month helping to instill some confidence that capital spending isn't further undermining economic recovery.

Andrew Wilkinson

Senior Market Analyst