Weekly Market Commentary: Markets remain on the thin side which probably explains some rather odd price action.

!! Overview !!
Markets remain on the thin side which probably explains some rather
odd price action. Many moves of the first week in January were
reversed this week, most notably the Euro/dollar exchange rate from a
low at $1.2860 to $1.3458, taking Euro crosses up with it, gaining
most against the Australian dollar from A$1.2900 to A$1.3500. Eastern
European currencies are at their strongest against the US dollar in
six weeks or so, while the Swedish krona at 8.8300 per Euro best since
September 2003. Stock indices have been very mixed indeed, each
working off its own dynamics. The Nikkei and US indices inched to yet
new recent highs, most European ones held unsteadily at December's
highs, with big regional variations; Spain's Ibex index at one point
managed to rally 10.5% in just three days - welcome probably, but
surely raising questions. Mumbai's Sensex lost 9.0% this fortnight and
at one point this week Bangladesh's Dhaka General Index lost 15.5%,
closing the exchange and causing violent street protests which were
broken up by the police. Interest rates also not moving in tandem:
Schatz at 1.17% highest in almost a year, likewise Polish five-year
(5.80%), though most ten-year Treasury yields while up a little on the
week remain within December's ranges. Baltic Freight Rates have
dropped considerably since November.

!! Political And Economic Developments !!
Father Christmas delivered no presents to Eurozone central bankers and
finance ministers; sovereign debt problems are back with a vengeance,
spreads over ten-year Bunds at new records for Belgium (143), Italy
(201) and Spain (275). A subsequent massive collective sigh of relief
and narrowing of spreads as Portuguese and Spanish TBond auctions
found adequate bids. German 2010 GDP grew at 3.6%, best since
unification after plunging in 2009, underlining the difference between
the weak and the strong. UK Manufacturing grew 5.5% in the year to
November keeping it at some of the highest levels in three decades.
The ECB and Bank of England kept rates unchanged at 1.00% and 0.50%
respectively, but in surprise moves the Central Banks of South Korea
and Thailand upped theirs by 25 basis points to 2.75% (the Kospi at a
new record 2,109) and 2.25% respectively. The People's Bank of China
raised bank reserve requirements by 50 basis points. They, like Mr.
Trichet, are a little rattled by above target inflation, though the
latter did boast of a 'remarkable track record' where Eurozone CPI was
1.97% in the 12 years since the single currency's introduction. Mervyn
King has no such luck, December Input PPI running at +12.5% Y/Y,
caused in large part by a weaker pound, something the MPC so happily
embraced earlier hoping it would prompt to an export-led recovery.

Instead, as any sensible person could have told them, it has caused a
record £8.74B trade deficit. Euribor and Short Sterling futures 30-60
basis points off highs; Eurodollars flat.

!! Underlying Themes !!
Blizzards, unseasonable snow, floods, mudslides, volcanic eruptions,
small earthquakes, thousands of birds falling out of the sky. Plenty
for a fanatic to latch on to. The worst 'La Niña' since 1973/74 will
continue until March so let's hope any further damage can be contained
while helping those in need.

!! What To Watch For Next Week !!
Monday the 17th a US holiday with Japan December Consumer Confidence
and UK January Rightmove House Prices early on. Tuesday busy with an
ECOFIN meeting too: Japan December Department Store Sales, UK
Nationwide Consumer Confidence, RICS House Price Balance, CPI,
November DCLG House Prices, US TIC Flows, January NAHB Housing Market
Index, Empire State Manufacturing Survey and German ZEW Survey plus
the Bank of Canada decides on rates (unanimously expected unchanged at
1.00%). Wednesday Tokyo December Condominium Sales, November Tertiary
Industry Index, Eurozone Current Account, UK Average Earnings, ILO
Unemployment, December Jobless Claims, EZ16 Construction Output, US
Housing Starts and Building Permits. Thursday Japan December
Convenience Store Sales, German PPI, US Existing Home Sales, Leading
Indicators, January Philadelphia Fed Survey and UK CBI Industrial
Trends. Friday Japan November All Industry Activity Index, UK December
Retail Sales and German January IFO. Sunday 23rdPortuguese
presidential election.

!! Positioning And Technical Analysis !!
Markets should get into their stride, dominant themes and trends
emerging. Rather than moving as a herd, with a 'risk on/risk off'
mentality, country-specific dynamics are likely to dominate
encouraging the natural momentum of markets. G7 Treasury yields may no
longer be trending down, but nor have they turned around starting a
bull move. Rather, we feel that interest rates are likely to move
broadly sideways this year, the trick is in getting the bands right.
Eurozone problems have not been 'fixed' but merely held at bay. Above
all this year we will see who has access to credit and at what cost.
Another round of differentiating between the haves and have nots.
Those who can generate cash or borrow it at reasonable rates should
prosper; those who cannot will have to either pay through the nose or
go without.
Source: ActionForex.Com