Investors’ sentiment turned negative in the third week in January, as a result wiping out any year to date gains for equity markets. Risky asset classes which had been benefiting from the stabilisation in the global economy have also experienced a correction. As a result commodities such as gold and oil have traded from their highs, while the safer havens such as government bonds have reversed the underperformance that was seen in December. Elsewhere the US dollar has added to the gains made towards the end of 2009 and is now trading close to the 1.4 level against the Euro.

Concerns that central banks will start to tighten the extraordinarily loose monetary policy is weighing on market sentiment. This is particularly noticeable after the Central Bank of China made its first attempt at tightening increasing the required reserve ratio by 0.5%, and hence requiring banks to keep higher reserves on deposit, which will have the inevitable impact in reducing liquidity. It is expected that many other central banks will follow suit and begin to withdraw liquidity from the system.

Worries about the ability of governments to continue to support the economic recovery has also come to the forefront. These fears were reiterated by the Democrats in the US loosing a seat in Massachusetts, which has been historically a democrat seat, to the Republican Party. Many investors have taken this as a sign of the discontentment that the US public have with the increasing deficit of the US government and the failure of Obama to address this. Elsewhere the risk around creditworthiness of governments has also come to light in Europe as the yield on Greek bonds has spiralled on the back of the lack of a coherent plan by the government there to address its increasing debt. The European Commission put further pressure on Greece by questioning the accuracy of the data, while the ECB highlighted the need for reform of the Greek public finances.

Fourth quarter earning season in the US is also underway, where by and large earnings and revenues have come in line with expectations. Earnings for the technology stocks have been ahead of expectations with revenues also outperforming. However the financial sector has been more mixed highlighting the complexities that continue to exist for this sector. Elsewhere concerns about increased regulation that may curb future profit growth is also impacting on the financial sector.