Bulls in China shop!

The Martin Luther King bank holiday in the US yesterday brought with it a very quiet and largely directionless market as investors and commentators digested the connotations of rating agency S&P’s action to Downgrade a large part of the Eurozones credit rating and to warn of further action on all but Germany. After the European daily close S&P even went a stage further and cut the EFSF (European Financial Stability Fund) by implication of the reduced ratings of its component guarantors.

The protestations of the Eurozone officials were audible upon release of the downgrades. In my view this sentiment is misguided from the Eurozone’s political leadership as the AAA ratings that textbooks would refer to as the ‘risk free’ rating are clearly not suitable for the embattled, indebted nations of the Eurozone. Perhaps worse that the political protestations, however, was the criticism of the European Central Bank President Mario Draghi whose own institution is reliant on the judgement of the rating agencies when it ‘suits’ them for collateral and a number of assessments and credit bandings.

Eternally Financing Systemic Failure - EFSF
The resignation letter of Jurgen Stark, who quit as ECB chief economist in September citing personal reasons was published yesterday and perhaps his sentiment highlights the rift between the Germanic ‘bundesbank’ thinking on policy in comparison to perhaps a less inflation wary ‘rest’ of the Eurozone.  Stark states that it is “an illusion to believe that monetary policy can solve major structural and fiscal problems in the eurozone.”  And that “the EFSF cannot possibly save Italy”.   

Domestic demand in China
The big news overnight however was not for once derived from within the European monetary construct. The Chinese data saw better than expected releases for Industrial production, retail sales and perhaps most scrutinised, GDP. The GDP figure, though better than expected, slowed from 9.1 percent in Q3 to 8.9 percent in Q4.  

The impact on financial markets however comes from the breakdown of the data.  Exports and housing were a bigger than expected drag on the Q4 data and while this is clearly positive news in highlighting the rebalancing of the economy, particularly when consumption appears to have risen to compensate largely for the component weakness, the issues in housing and exports (potentially as a result of further global slowdown, or worse) created speculation that the authorities will ease lending curbs further and increase fiscal spending to support the economy.

The debate as to the hard/soft landing of the Chinese economy will continue but in the very short term, the implications for looser Chinese policy has given rise to a more positive risk backdrop, which has boosted equities and broad risk assets overnight.  

A quiet outsider?
Inflation data in the UK this morning has highlighted the base effects of tax change and other factors in showing a sharp decline in the annual increase in consumer prices to 4.2 percent year on year in December from 4.8percent year on year in November. The focus of the markets is not in the vicinity of the UK at the moment as perhaps more pressing issues play out in the Eurozone and Asia. However the ‘well behaved’ data and the quiet progress of the UK will be increasingly highlighted on a relative basis as 2012 progresses. Uncertainty is still a core descriptive narrative of financial markets however as the cloud of uncertainty gradually dissipates, I see GBP as the best performing Major currency in 2012.