Reversal of ’09 tailwind is the ’10 headwind for stocks

The major headwind that markets face in 2010 is the reversal of the key tailwind of 2009, that being extraordinary monetary and fiscal stimulus. For those countries that have recovered well and are not highly levered, removing monetary stimulus in particular is somewhat of a high class problem but in terms of equity performance that has priced in a lot of good news, it has an impact. Overnight we saw solid manufacturing index releases from China, India, Australia and Taiwan with higher inflation and their stock markets are all lower in response to the growing likelihood of more tightening. Australia is expected to raise rates tomorrow by 25 bps to 4%. The euro region and UK also saw good manufacturing #’s ahead of the US ISM as the inventory build story is global. Greek bonds are up and 5 yr CDS are trading lower on the growing belief that while Greece will be pushed as hard as possible to cut spending, the EU stands ready to provide support in a worst case.

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