The issues around creditworthiness of governments continued to cause volatility in financial markets in February. Currently concerns are focused on the situation in Greece, which have been given four weeks to act decisively to tackle its budgetary problems. Therefore markets will have to wait until March 16th when the European Council will debate if the action taken by Greece has been appropriate, while markets will also be vigilant if the authorities attempt to raise capital over the coming weeks. Elsewhere Spain also submitted a stability programme to the European Commission on its plan to address its budget deficit to 3% of GDP by 2013. It plans to do this by increasing taxes this year and outlined public sector wage cuts for 2011.

The Federal Reserve has also become more hawkish over the past month, most recently it raised the discount rate (i.e. the rate in which banks borrow from the Federal Reserve) by 0.25%. This decision reflects confidence that the Federal Reserve has in the banking system and is another indication that the bulk of the emergency lending facilities have run their course. Markets had a muted reaction to the move as it is not seen as an indication that the Federal Reserve is changing its monetary policy stance. This is likely to be reinforced when Fed Chairman Bernanke delivers his semi annual monetary policy report to congress on Wednesday, February 24th. Elsewhere the US January inflation report last week also justified the loose monetary stance of the Federal Reserve as core inflation declined by 0.1%, the first monthly decline since 1982.

The fourth quarter US earnings season draws to a close as 422 of the 500 S&P companies having already reported. 72% of companies reported earnings that were ahead of expectations, while 70% of companies reported sales ahead of expectations. However management of companies were cautiously optimistic on their outlook for 2010, particularly the outlook for top line growth. The technology sector collectively reported the strongest results for the S&P 500, citing an improvement in both corporate and consumer spending as sources for the strength. Firms with exposure to emerging markets noted stronger strength this regions although the technology sector cited the US as a recent driver of improved demand. Management teams were also more upbeat on their intension for hiring for 2010, which is seen as a necessary caveat for the recovery continuing.

All in all, equity markets have recovered somewhat from the losses seen in January, but remain below year end levels. Bond markets, on the other hand have sold off as the German ten year yield now stands at 3.28% up from the low of 3.12% in the first week of February.