Global Markets

US Treasuries rose last Friday in thin trading and end-year positioning. The two-year yield was down 5 bps from 0.65 per cent to 0.60 per cent, whilst the 10-year yield fell 4 bps from 3.37 per cent.

Longer term, it is likely that US Treasury yields will rise, as the US economy improves more and investors move away from low-risk government bonds and into riskier, higher-yielding assets. The success of upcoming large US Treasury auctions in 2011 may attract market interest.

Higher US Treasury yields could be worrisome for the economy especially if borrowing costs for consumers and businesses could rise and the US recovery is still weak. As the new year begins, the focus will be on whether US Treasury yields will rise in 2011.

Week ahead slightly heavy on US data front culminating in US employment data and Bernanke’s testimony on Friday. The highlight of this week will be the latest US jobs report, out Friday. The consensus is for the unemployment rate to remain steady at 9.8 per cent. If they are much stronger than expected, that could set the bond market on the path to higher yields. Later that day, Bernanke’s Congressional testimony on the economy will also be closely watched for any changes in his assessment as the new year gets under way.

Global Markets today: US ISM manufacturing index December (consensus: 56.9); US construction spending (consensus: 0.2 per cent m/m), Germany PMI index (consensus: 60.9); Tues: US FOMC minutes, US factory orders (consensus: -0.1 per cent m/m); Wed: US

ISM non-manufacturing index (consensus 55.5); Thurs: EU16 retails sales (consensus: 0.1 per cent m/m); Germany Industrial orders (0.6 per cent m/m); US initial jobless claims (forecast: 410K); Friday: Bernanke’s testimony to senate budget panel on monetary and fiscal policy; US non-farm private payrolls (consensus: 145K).

Gold prices rose on Friday, as the combination of a weaker dollar as investors close their books and global economic uncertainty seemed to pave the way higher next year. The Comex January 2011 gold futures contract settled up 15.50 to end at US$1,421.1/oz. Gold prices should continue to rally into 2011 on the back of strong fundamentals, including inflationary pressures (notably in China), ample liquidity and concerns about the value of the dollar. Oil prices rose on Friday with the prompt-month NYMEX crude futures contract ending the session at US$91.38/bbl from US$89.84/bbl.

Asian Markets

Asian currencies strengthened against the USD in the last week of 2010 as risk-taking rebounded. Gains were led by KRW (2.2 per cent), TWD (1.3 per cent) and SGD (1.2 per cent). For the whole of 2010, the largest appreciation was in MYR and THB, which rose by more than 10 per cent against the USD.

With attention likely turning towards inflation-fighting from growth this year, we could see Asian currencies continuing to outperform. The focus will remain on the RMB, which is expected to continue on an appreciation pace of 3 to 5 per cent against the USD this year.

Chinese Premier Wen Jiabao has reiterated the government’s commitment to contain inflationary risks in 2011 after headline inflation hit a 28-month high of 5.1 per cent y/y in November. For Monday, Japan, China, Thailand and Vietnam will be on holiday.

Asian stock indexes mostly ended higher on the last day of the year amid thin liquidity. The Hang Seng Index rose 0.2 per cent, while Shanghai CI was up 1.8 per cent on Friday. In Singapore, the STI fell 0.7 per cent in half-day trading Friday. Activities are expected to pick up pace next week with Alcoa kicking off the US corporate earnings season on January 10.

China’s official PMI edged lower to 53.9 in December from 55.2 in November, indicating a slowdown in the manufacturing sector. While this was the first easing since July, the PMI has stayed above the 50-threshold for the 22nd consecutive month. The data was in line with the HSBC China PMI released earlier.