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The resilience of the recent trading patterns is remarkable. The euro and sterling have generally trended higher this month. Neither the German Constitutional Court doubts about the legality of OMT, nor speculation of a deposit rate cut, the collapse of the Italian government, or even today's disappointing PMI data have been sufficient to derail the euro's advance. Although the advance stalled in front of its nemesis from last year near $1.38, the pullback has been shallow and the market does not appear done testing the offers thought to be stacked around there.

Sterling remains resilient, though the recent data, including the CPI figures, have generally reinforced the BOE's message that interest rates are unlikely to be raised this year. The implied yield of the December 2014 short-sterling futures contract has fallen about 10 bp this week. Yet, sterling remains at elevated levels, as it consolidates the gains that carried it above $1.68 at the start of the week. The down ticks have thus far been limited to the $1.66 area.

The US stock market also seems resilient. Recall that the S&P 500 shed 6% very quickly in the second half of January. It reached a low of about 1738 in early February and by yesterday returned within spitting distance of the 1851 area that marked the record high seen in mid-January.

The dollar also seems somewhat resilient against the yen. The dollar peaked in early January around JPY105.45. It spent most of January and into early February sliding, reaching a low about JPY100.75. It has since rebounded to JPY102.75 before running out of steam. It is consolidating now, but a trend line drawn off the lows comes in near JPY101.50 and the price action suggest the dollar is more likely to retest the recent highs than lows.

Although the Australian dollar was sold on the disappointing flash HSBC manufacturing PMI for China (7-month low of 48.3 down from 49.5), it held important support in the $0.8925 area. It too appears fairly resilient. It can return to the $0.9000-40 area in the coming days. The multi-year low was set in late January near $0.8660.

There are a few investment patterns that could be changing, where inertia may be challenged. First, last year and into the first part of this year, it appeared small cap stocks were generally outperforming large caps. That appears to have weakened lately. The pattern is less evident in the US, but is clearer in the UK, China and to a less extent, Japan.

Second, after selling off from the second half of October through early February (by almost 13%), the MSCI Emerging Market equity index has recovered over the past two weeks, trading about 5.5% higher before stalling earlier this week near 966. It has pulled back in recent days, but so far the down ticks have been limited. Our sense of market sentiment in this space is cautiously optimistic. A move below the 946 area may spur concerns of a deeper correction, but generally, we see asset managers looking for buying opportunities.

Third, Chinese shares have generally disappointed many who think that it is the factory of the world and eating everyone else's lunch. However, Chinese shares have quietly been rebounding. In the past month, the Shanghai Composite is up nearly 7.5%. It is easily the best performer in the BRICs and is handily beating the G10 equity markets.

Fourth, the latest MOF data warns that Japanese portfolio flows may be changing. Japanese investors bought foreign bonds last week, snapping a six week selling spree. Japanese investors also bought foreign equities last week, for the only the second time since mid-October.

That said, seasonally, Japanese repatriation ahead of the fiscal year end (March 31) has creased some clear seasonal patterns. Over the past 10 years, Japanese investors have been net buyers of foreign bonds in all but one January. They have been sellers in February eight of the past ten years and March in all but one year.

For their part, foreign investors, who could not get enough Japanese shares last year, continue to be sellers. Foreigners have sold Japanese shares five of the past six weeks. The most recent data shows they were sellers of Japanese bonds, snapping a three week buying streak.

Fifth, since the middle of last year, investors have shown a clear preference for Spanish and Italian bonds and stocks. Even after the Germany court ruling and the fall of the Letta government in Italy, the Spanish and Italian asset markets continued to shine. However, we warned earlier this week that the Italian market in particular, but other peripheral markets by extension, were vulnerable to some profit-taking. In Italy's case, we spoke of "buy the rumor, sell the fact" on Renzi's ascension. The Italian and Spanish 10-year yields have risen 12-14 bp off the low seen Wednesday.

Italian shares have backed of the multi-year high set earlier this week, but the pullback has been shallow and the risk is that the highs still lie ahead. Spanish shares recorded their peak in mid-January. It has recovered a bit over the last two weeks, but is still nearly 5% off those mid-January highs. It too looks poised to trade higher as well.

Source: Resilience Of Inertia