Risk aversion showed signs of returning yesterday as we witnessed a strong rebound in the US dollar, with EUR/USD breaking back below the key 1.5000 mark. In addition, the CBOE volatility index (VIX) closed up 9.2%, its biggest one day percentage gain in over a month. There were numerous reasons for this increase in risk aversion but most centred on the point that governments are now more closely looking at exit strategies or ending the record amount of stimulus.

Whilst the news that Hong Kong has enacted measures to restrain property speculation dented sentiment in Asian markets overnight; we are now awaiting news from India in its central bank quarterly report. It is expected that the central bank will signal the start of reversing the accommodative stance of monetary policy on concerns that inflationary pressures are building. Analysts expect the report to note that India is at “a turning point”, and they are likely to encourage lenders to set aside more cash as reserves. For India, the expectations are for the platform to be established today for a future hike in rates.

Meanwhile, tomorrow the market is expecting the first European central bank to raise rates. The general consensus is that Norway will hike rates by 25bps to 1.5%. Norway, supported by being the fifth largest oil exporter returned to growth in Q2 2009. Their “V” shaped recovery was supported by a 4.7% GDP stimulus package and record low interest rates. It is difficult to ignore the fact that whilst Europe starts looking at hiking rates, the UK’s central bank discussion, next week, is likely to be focused on further quantitative easing. Whilst, given the poor state of our public finances before the sub prime crisis, the UK fiscal stimulus in comparison to its peers was much smaller; the equivalent of 1.8% of 2009 GDP and this has not supported our recovery to the same extent as other major economies.

Given Wall Street price action and that of Asia it looks likely that equity markets could be in for a period of consolidation. Earnings reports are slowing down and today, the economic data of note focuses on the US conference board consumer sentiment and Case-Shiller home price index.

Sources: Reuters: BBC: Bloomberg: Lawshare: Deutsche Bank (db): Proquote: Financial Times: Wall Street Journal: CLSA: Sharescope: Market News. Capital Economics: CNBC: Wikipedia:

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