S. Balakrishnan

DECEMBER 2004 and January 2005 so far have been full of excitement for the markets.

The end of 2004 saw the euro scaling new heights. It soared to almost $1.37 before being rather abruptly brought down to earth. The provocation was the release of the minutes of the last meeting of the Federal Open Market Committee (FOMC) - which sets US interest rates - suggesting American interest rates could rise faster and higher than assumed by the markets.

A raft of weak eurozone economic data added fuel to the fire and the euro lost momentum as quickly as it had gained it only the previous week. The record US trade deficit of $60 billion gave the euro some relief, but the breather was short-lived.

US Treasuries too had their slice of the action. Both the PPI and the CPI remain well-behaved.

Inflation seems to be contained despite rising energy prices and a growing economy. The result was a significant drop in bond yields with 10 years falling to 4.1 per cent levels from almost 4.3 per cent.

The 10 years/ 2 years yield difference has dwindled to less than 100 basis points - a far cry from the situation just a few months ago before the Fed started raising rates when it was as much as 300 basis points. An eventful period is ahead for financial markets.

The coming Friday will see fourth quarter GDP data out of the US. Looming ahead next week is the all-important FOMC meeting. While a 25 basis points increase can be taken as a done deal, the market will, as usual, dissect the post-meeting statement for the Fed's assessment of the economy, risk factors and the likely pace of future interest rate increases.

No sooner is the FOMC done, attention will turn to the US jobs situation emerging from the non-farm payroll numbers. It will be a crucial statistic for all markets - stocks, bonds and currencies. There is still more to come. G-7 Finance Ministers meet in the first weekend of February. India and China have been called. Does it portend arm-twisting to get them to revalue their currencies?

Talk of China revaluing has been rife for the last couple of years, but nothing has happened. One way or the other, the outcome is a market mover. All in all, a relentless flow of data and meetings. The markets will get no respite. How different will they look after everything is over is the billion-dollar question.

(This article was published in the Business Line print edition dated January 26, 2005)
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