Correction Tuesday?

China's slew of economic data came in better than expected this coupled with successful bill auctions by Spain, Greece and Belgium and a very strong German ZEW (-21 v -53.8) is rekindling the appetite for risk today.  The euro is up over a cent and is running into resistance near $1.28.  More generally, major and emerging market currencies are trading broadly higher against the greenback.  Equities and commodities are higher. 

The euro is over-extended on short-term momentum indicators.  The euro has been stopped at $1.28 in the European morning.  Initial support now is seen near $1.2740 and a break of there would likely be seen as yet another failure to rally, with record net short IMM positions.  On the upside, a move above $1.28 would bring the next retracement target into view in the $1.2880-$1.2900 area. 

Sterling ran out of steam near $1.54.  The UK CPI moderated in line with expectations in December and this is likely to reinforce ideas that an additional round of gilt buying will be announced by the BOE next month.  The year-over-year measure of inflation fell to 4.2% from 4.8% and further declines are expected in the coming months.  Initial support for sterling is seen near $1.5360, but it may require a break of $1.5320 to suggest a top is in place. 

China's economnic data is consistent with a mild easing of conditions.  It does not prevent a further easing of monetary conditions in China.  Moreover, relative to consensus, the data, GDP, retial sales, industrial output were all stronger than expected.  Fixed asset investment was the one that came in a bit lower than expected (23.8% vs 24.1%), but can hardly be considered weak.  Chinese stocks bounced strongly, lead by basisc mateirals, industrials and technology.   The 4.2% rally in the Shanghai Composite appears to be the biggest single day boucne in a bit more than two years. 

Portugal had been squeezed out of the limelight by the market's focus on Greece and Italy.  Yet of the S&P downgrades at the end of last week, Portugal's may be the most significant.  By joining Moody's and Fitch with a sub-investment grade rating for Portugal, S&P 's decision will likely result in Portugal being dropped from bond indices that are used as benchmark for money managers. 

Tomorrow Portugal intends to issuing bills.  In addition to 3 and 6 month bills, Portugal intends on selling an 11-month bill, which is a particularly long maturity for it.   The downgrade also raises the prospects that Portugal, like Greece, will need another aid package. 

Unlike Greece, though the Troika has generally affirmed that Portugal is implementing its austerity program, but the general environment is aggravating its challenges.  Fitch today warns that Greece is likely to default on the March 20 14.5 bln euro bond maturity, Portugal does not have a bond maturing until June (10 bln euros).  Portugal's borrowing needs for the year are a modest 17.5 bln euros. 

Portugal, like Italy, did not experience a housing market bubble, as Ireland and Spain did.  Its problem is not so much fiscal excesses as painfully slow growth.  Under EMU, it has averaged less than 1% annual GDP and this year the economy is projected to contract by 3%.    Although some observers have opined that Greece exiting EMU would help stabilize the situation.  Yet the risk is that if Greece were to leave, speculation would increase, not diminish, that Portugal would be next.