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With few exceptions, the global capital markets which began the week with a bang, are finishing with a whimper. The US dollar is little changed against the major and emerging market currencies. Asia stocks were by and large flat, with the notable exception of Chinese stocks, where the major indices jumped a little more than 4%.

European bourses are mixed, with gains and losses mostly less than 0.25% near midday in London. Spanish and Italian bond yields are slightly lower, but activity is quiet.

Despite the subdued tone there are four developments to note.

1). The jump in China shares today, the most in 3 years, was driven by two considerations. First, there are reports suggesting that government may let more funds buy securities. Financial firms, which include brokerages, led the advance, gaining over 5% today. Government-backed firms were also reportedly featured buyers. The index of Chinese companies that trade in HK rose almost 1.5% to a 9-month high. Second, sentiment was also aided by the December flash HSBC flash manufacturing PMI that rose to 50.9 from 50.5 in November. This is a 14-month high and helps blunt some lingering disappointment over some recent data.

2). Japan's Tankan survey disappointed and this helped keep the yen under pressure on the eve of the election. The diffusion index for large manufacturers fell to -12 from -3 in September and this was a bit worse than expected. The larger service providers also saw sentiment slip to 4 from 8. The relative bright spot was capex plans and that improved to 6.8% from 5.4%. The weak general results, however, can only strengthen views that 1) the BOJ is likely to expanded its asset purchase program at next week's meeting by JPY5-10 trillion, and 2) that the DPJ are going to be swept from office and push an aggressive monetary, fiscal and foreign policy.

3). It has been a fairly good week for Europe. A deal for Greece was reached. An agreement on bank supervision was reached. Yes, it is not a full banking union and a common deposit insurance scheme is not included, but it does seem like a step forward. And, perhaps, just as importantly, the mere fact that there was a summit defies the loud calls and warnings that an EMU break up was imminent.

The economic news, however, is not so good. It strikes us as a bit misleading to talk about the euro zone composite December flash PMI at a nine-month high. It stands at 47.3. This is still contraction mode. Preliminary details on Germany and France are available. The German composite did edge back above 50 to 50.2, for the first expansion since April, but the manufacturing sector unexpectedly weakened further (46.3 vs 46.8). The strength was in the service sector (52.1 vs 48.0).

For its part, France showed improvement in both gauges, but it still looking at a strong economic drag. Manufacturing edged to 46.3 from 46.2. The market had expected a stronger gain. Recovery in services was more pronounced rising to 47.8 from 45.7.

4). Lastly, we note the price action itself. Although the dollar is little changed on the day, the underlying tone is weak. Bounces have been shallow. The euro's recovery this week off the $1.2880 low at the start of the week has been impressive and it is poised to close above a 18-month old down trend line. The highs from September, October and earlier this month have been set near $1.3170, $1.3140, and $1.3130. The offers in this area are likely to be absorbed and thin trading over the holiday period could exaggerate the price action.

The fundamentals that support this is the fact that by most accounts, including Taylor Rule type exercises, the FOMC was quite aggressive. The dollar is, however, making new 9-month highs against the yen. The JPY84 area has been approached and the market has its immediate sights on year's high set in March just shy of JPY84.20. Similarly, the euro has approached JPY110 and the year's high in March was near JPY111.45. Sterling and the dollar-bloc has generally lagged in the broader move against the dollar, but share the direction.

Source: 4 Drivers, Little Movement