At the end of last week, Chinese authorities have undercut a rising wave of optimism on the market by announcing a second increase in the rate of reserve requirements this year (entered into force next week). It's probably not the last such move by the Chinese government, which means that global markets may from time to time expect to be "cold showered", as the way Chinese authorities decide over monetary policy parameters is still very vague. This time, however, the market reaction to this decision was short-lived and weaker than in January, especially as some major financial institutions (including Goldman) reaffirmed GDP growth forecasts.  For as long as macroeconomic figures from Chine come out strong, the impact of future monetary policy tightening measures might be even smaller. .

After four consecutive weeks in charge of the bears, last week ended with increases in the U.S. stock market. For most of the week the market was governed by emotions - prices reacted to speculation about a package of aid for Greece and not fundamental data, which were mostly good. Those include a sharp decline in initial claims in the US (to be confirmed this week), retail sales growth and unexpectedly large increase in employment in Australia. This picture was flawed by a weaker GDP figures from Germany and Italy. Despite China's decision on Friday, the bulls looking to end the correction might see a few signs of hope. One of them is a clear buy signal given by the stochastic oscillator on weekly intervals for contracts for the S&P500. Another sign comes from the last hour of the cash trading in New York. This decisive hour was clearly dominated by sellers at the beginning of the correction. On both Thursday and Friday last week, the situation was virtually opposite. Earlier corrections ended in a fairly dynamic reflection, albeit a long white candle will be hard to achieve today - since we have a day off in the U.S.

While the stock indices reveal a growing influence from the bulls, EURUSD remains dominated by sellers. Thursday's downward movement  was extended on Friday after weak GDP data from Germany and the decision from the Chinese monetary authorities. As a result the 1.3585 support was broken, and the pair fell to a level of 1.3529. While an upbeat session on Wall Street caused a negation of this short term move, the euro didn’t manage to bounce back in a visible way. The market may still aim at 1.3417, and any major change in the balance of power requires buyers to overcome the level of 1.3850.

Given the small number of macroeconomic data, the market will be involved in a speculation about the aid package for Greece again. Perhaps more details will be announced on Tuesday after a meeting of EU finance ministers. On the macroeconomic front in the US, data on housing starts and building permits are scheduled for Wednesday, early regional activity indices on Tuesday and Thursday, and inflation figures on Thursday and Friday. None of those (not to mention non-US figures like the German ZEW) are likely to decide on the course of the market though.

Przemysław Kwiecień Chief Economist

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