Unstable Markets as Sentiment is Fragile and Data Disappoint

Markets remain under pressures although some correction was seen this morning following the sharp losses suffered yesterday. Concerns over the outlook of the European debt crisis will persist today after Fitch downgraded five major European banks.

Yesterday yields on Italian 2-year bonds rose to a record high of 6.47%, the highest since 1997, while German yields fell to 0.29% highlighting that traders are heavily targeting safer investments as the global economic growth is being further damaged by the European debt crisis.

Investors may continue to avoid riskier assets and head towards the safe haven USD and treasuries, whereSpainsold today 6 billion euros of bonds far surpassing a target of 3.5 billion euros as demand proved to be very solid. The bonds were sold at a lower average yields than the previous auction.

Fitch downgraded yesterday five major European banks including Banque Federative du Credit Mutuel, Credit Agricole, Danske Bank, OP Pohjola Group and Rabobank Group, and warned of a “broader phenomenon of stronger headwinds facing the banking industry as a whole”.

AsEurope’s economy is likely to slip back into a recession while downgrade risks by major rating agencies remain high, sentiment continues to be fragile. Thereby Asian stocks dropped further today with the MSCI Asian pacific Index falling 1.8% at 16:20 inTokyo.

In Europe stocks opened higher, where FTSE 100 gained 0.62% while DAX rose 1.11% mainly as a technical correction, after the sharp losses seen since Monday. Yet this rally is likely to be short-lived since European leaders failed to adopt a last solution to the debt crisis.

Economic data confirms the slowdown seen in global growth; in Japan the Tankan index of sentiment among large manufacturers fell more than expected; in China the foreign direct investment dropped for the first time since 2009 and the preliminary PMI manufacturing showed the sector may contract a 2nd month.

In Europe and Germany the services and manufacturing PMI improved slightly in Dec., yet employment fell during Q3 inEuropeby -0.1%. InU.K.retail sales dropped considerably in Nov. from the previous month. Switzerland held the interest rate steady at 0.0%, while the industrial production fell by -1.4%.

Markets are eyeing today important economic data from theU.S., including the weekly jobless claims, the industrial production, the Net TIC flows, the current account, the PPI, NY empire manufacturing, as well asPhiladelphiafed index and finally the EIA natural gas storage change.

The euro is trading with some bullish momentum around the 1.3005 after Dec.’s manufacturing and services PMI rose in Germany and Europe. The pound also found some upside support, and is trading now around the 1.5520 level after the USDIX fell today towards the 80.30 level.

The yen is trading around the 77.85 level while the CHF is trading around the 0.9435 since demand on safe havens is still strong. The AUD is moving in a tight range around the 0.9915 as investors are still worries over the outlook of the European debt crisis.

Commodity markets were severely hit by the pessimism spread among traders this week. Oil fell below the $95.00 per barrel level after OPEC decided yesterday to increase daily production to 30 million barrels in order to avoid shortage of supplies and stabilize prices. Crude is now trading around $95.80 level.

Gold broke the $1600.00 level as inflation risks are easing while investors head for the safe haven USD. Yet commodities recovered some of the losses where gold is trading around the $1590.00 level, yet pressures may continue to be bearish as concerns over the outlook of the global economy persist.

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