If you’ve been too busy finishing off the Christmas pie or busting out the champagne on New Year’s Eve, then here’s a recap of all the major drama during the holidays! Find out how China shocked the markets on Christmas Day, the U.S. clocked in last-minute surprises in 2010, and how the euro zone started 2011 with a bang!
China hikes rates on Christmas Day
The People’s Bank of China (PBoC) stole the spotlight from Saint Nick last December 25 when it raised its benchmark lending rate and deposit rates by 25 basis points to 5.81% and 2.75% respectively.
With China’s annualized inflation at a 28-month high of 5.1% in November, it shouldn’t have surprised the markets that the PBoC raised rates for the second time in two months. Heck, inflation was below 3% just five months ago, and was even at 0.6% last year!
As big as the announcement was, markets showed limited reaction to the news. The euro gave up a few pips to the Greenback and the yen after the notice, while commodity-related currencies like the Aussie also slipped on global economic growth concerns.
Gotta keep your eyes peeled for this one though. Market hotshots are saying that the drama ain’t over yet, and that markets are just warming up from the holidays. Many expect the volatility to kick up in late January, so don’t let any more surprises hit you!
U.S. prints strong data, surprise surprise!
Amidst all the year-end countdowns before 2010 came to a close, the U.S. economy flexed its muscles and showed strong determination to end the year on a high note. A day before the ball was set to drop in Times Square, the U.S. released a few economic reports that showed promising improvements in the employment, manufacturing, and housing sectors.
The weekly jobless claims data showed that the number of people filing for unemployment benefits for the first time finally sank below the 400,000 mark. The figure landed at 388,000, which was less than the projected 416,000 in initial jobless claims. Then, the Chicago PMI logged in another impressive reading when it jumped from 62.5 to 68.6, instead of sliding to the 61.2 market consensus. A few minutes later, the pending home sales put the cherry on top with its 3.5% increase. That’s almost twice as much as the projected 1.8% uptick!
Now what could all these mean for the dollar? Would fundamentals prop the U.S. dollar up or would risk appetite push this safe-haven currency down? As it turns out, dollar pairs barely budged during the release of the reports, but that was mostly because traders were busy gearing up for New Year festivities. Judging from the recent price action though, it does look like the improved U.S. data got risk appetite back on its feet!
Estonia joins the euro zone
Probably the biggest news to kick off 2011 was that Estonia formally joined the euro zone on January 1.
Over the past couple of years, despite poor economic growth, the Estonian government has implemented strict spending guidelines in order to ensure their participant in the bloc. This has kept debt levels in check and as a result, it is expected that the country’s debt-to-GDP level will be at 1.6%, way below the required 3.0%.
While Estonian Prime Minister Andrus Ansip says that joining the euro zone should lead to more jobs and faster economic growth, there are those who are screaming “WHY THE HECK WOULD ANYONE WANNA JOIN THE EURO ZONE NOW?!?”
Actually, only half of all Estonian people are in favor of joining the euro zone. The concerns center on the fact that the EZ has already bailed out Greece and Ireland, and there is still a big risk that more are to follow. Remember, being part of the bloc means that Estonia will have to contribute to any bailout funds in the future. Why should Estonia pay for the mistakes of other countries when they have been responsible?
It’ll be interesting to see how this plays out over the next couple of years, when other nations like Latvia and Lithuania aim to join the EZ as well. Will they see the potential risks and bide their time? Or will they see it as an opportunity to improve their economies?
As I mentioned earlier, the markets only budged a little to these events over the holidays. But as traders jump back into action this week, these events could still play a role in shaping market sentiment over the next few days. I’m sure y’all enjoyed a relaxing break from the markets and are feeling refreshed and ready to trade again, so make sure you keep these events in mind before entering your first few trades for 2011!