SCOREBOARD: Jitter bugs

Price action was volatile across most markets overnight as investors grapple with a number of crosscurrents. Firstly, China hiked the reserve requirement for some banks yesterday. Nothing too onerous and, overall, a minor policy response to the problem of excess liquidity. If the Chinese government was really concerned they would take harder measures. Nevertheless, these actions aren't generally supportive of risk trades, however minor they might be. That said, the fact that Chinese exports and imports continue to grow strongly generally does support risk trades.

Similarly, US economic data continues to surprise on the upside. It was US jobless claims last night and they dropped sharply to 435,000 from 459,000 in the week to November 6. Moreover, the four week moving average, which smooths out volatility, is at 446,000 or its lowest point since September 2008. Continuing claims fell to 4.3 million from 4.38 million and a peak in 2009 of 6.6 million. New claims are elevated for sure, but they are improving, and as we know haven't stood in the way of 1.1 million private sector jobs being created over the last 10 months. In sum, economic data we've seen over the last 24 hours supports the fact that a robust global recovery is underway.

Against that backdrop the market has to deal with a number of uncertainties. Concerns over some of the peripheral euro zone economies seem to be lingering and spreads continue to blow out here and Irish bond yields were up 92 basis points on the 2-year (6.16 per cent) and 70 basis points on the 10-year (8.63 per cent) after LCH.Clearnet raised margin requirements on Irish debt. The issue isn't as serious as some of the press would make out though. Don't get me wrong, I'm not saying there aren't problems – there are. But whether they are sufficient to destabilise growth and cause the disintegration of the euro zone is another matter entirely and far fetched one at that. Don't forget that in many cases peripheral euro zone debt markets are highly illiquid. It is difficult to draw firm conclusions from market pricing as a result. For instance Ireland is fully funded this year and doesn't need to tap the market until mid 2011. Even then, the worst case scenario is they opt in on the European bailout and get funded at 5 per cent. Market pricing would appear out of whack against those facts. I mean just looking at the mathematics of it, this is something Ireland can afford. It may hurt, it may not be popular, but on the basic question of whether Ireland can repay, the answer is yes they can – they've had worse, a lot worse and pulled through.

The issue also weighed on European equities and the major indices fell between 0.7 per cent and 1 per cent. This bearish sentiment initially flowed across the Atlantic as well and at the low, the S&P500 was down 0.7 per cent. A bid developed soon after and as I write, stocks are modestly higher, supported by financials, energy stocks and basic materials. A decent lift in commodities provided much needed support here and crude was up 1.2 per cent ($US87.8) with an hour left to trade, gold was $US10 higher ($US1403) although copper was down 1.4 per cent. A part of the price gain in crude was US dollar driven and greenbacks are generally weaker against the major currencies – Australian dollar at 1.0053 ( 22 pips), euro up 17 pips to 1.3778, yen at 82.15 from 81.78 and sterling at 1.6123 from 1.59995. That said a report from the energy department showed a fall in inventories across crude, gasoline and distillate fuels.

In any case, and with 50 minutes to go, the S&P500 is 0.3 per cent higher (1216), the Dow is flat at 11348, the Nasdaq is up 0.5 per cent (2575) and the SPI is 0.6 per cent higher at 4742.

Now on the rates side, yields pushed higher for most of the session, largely on growing market disapproval of QE2 and, on a not unrelated issue, generally poor results at recent Treasury auctions. A total of $US16 billion of 30-years were on offer last night with the spread between the stop and median yield at 10 basis points compared to the recent average of 5.9 basis points. Cover at 2.31 was weaker than the average (2.64) and the worst result in about a year. As I write, yields are down from their session highs though and this follows an announcement from the New York Federal Reserve that, and in conjunction with QE1, they would be buying about $US105 billion Treasuries per month. That's 18 open market operations over the next 30 days. So from the highs, the 10-year is down 11 basis points to 2.66 per cent (flat from 1630), the 5-year is off 13 basis points to 1.22 per cent (also flat from yesterday) and the 2-year is down 5 basis points to 0.43 per cent (up 1 basis point from yesterday). Aussie futures traded within a 7/8 tick range to be down smalls at the time of writing – 3s at 94.85 and 10s at 94.62.

Other than that the Bank of England upgraded its CPI forecast to 1.7 per cent in 2 years time from 1.5 per cent previously (that's why sterling rallied so hard). We saw mortgage applications in the US surge 5.8 per cent in the week to November 5 with refis and new purchases up almost 6 per cent. Finally the US trade deficit narrowed to $US44 billion in September as exports rose 0.3 per cent and imports fell 1 per cent.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.