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European bailout fund sees solid demand despite downgrade

China released economic data last night that showed the economy had growth 8.9% in the fourth-
quarter, from the previous year. Whilst this looks fantastic compared to the anaemic growth rates in
the Western world, this represented the slowest growth rate in more than two years for the country,
although the final rate came in higher than anticipated. What would usually be negative news was
instead welcomed by markets, as the evidence of a slow-down increase the likelihood that the
authorities will ease monetary policy. Asian equity markets, currencies and commodities rose, with
European markets opening up around 1% higher.

The good start to the came despite a further downgrade form S&P last night, this time for Europe’s
bailout fund, the EFSF. As with the downgrades of nine eurozone countries on Friday night, this
was an obvious next step for S&P given the reassessment of its contributors, and as such the move
was already priced in. In fact, the fund actually had a relatively successful bond auction today, with
strong demand from Japan seeing €1.5bn worth of 6 month bills at 0.2664%.

In other positive news, the rate of inflation reduced for the third consecutive month in December,
with prices as measured by the CPI rising 4.2% over the year. Whilst still high and well above the
Bank of England’s 2% target, it compares to 4.8% in November and a peak of 5.2% in September.
Heavy discounting by clothing shops and supermarkets in anticipation of Christmas were
contributory factors to the decline.

The FTSE 100 was buoyed mainly by mining stocks in response to the Chinese data, the 36 points
added today saw the index up 0.65% to 5694. The French CAC and the German DAX put on gains in
excess of 1%.

This was posted in Bdaily's Members' News section by John Dance .