The equity markets were able to build up momentum last week, allowing the S&P 500 Index to rally 33 points or 3.3% for the week.  The commodity market also joined the party, as the dollar traded mixed due to global uncertainty.

The week started off on a positive note for riskier assets due to positive news out of Japan.  The gloom is lifting slightly from the Japanese economy, as sharp growth from China and other Asian neighbors is lifting exports and spurring more capital spending by the nation’s manufacturers.  The Japanese economy grew at a faster pace than expected, expanding at a rate of 4.6% for the three months ended Dec. 31.  The economic figures also showed that the slight increase in domestic demand also helped lift Japan out of its worst recession. Private consumer spending, which accounted for about 58% of real gross domestic product, rose 0.7%, supported by government measures to encourage purchases of energy-efficient electrical appliances and cars. That was the third straight quarter of gains. The GDP deflator-an indicator that gives a broad reading of price trends-worsened to a record low of a 3% decline in October-December from the previous year, compared with a 0.6% decrease in the previous quarter. A fall in domestic prices pushed down the deflator, showing that the gap between supply and demand is still increasing.

The Federal reserve surprised the market by raising its discount lending rate to banks from 0.5% to 0.75% thus effectively raising the spread on Fed funding to 0.5%(Discount rate less Benchmark rate).The Fed chairman already announced in his statement earlier this week that the Fed will move very soon to tighten the discount rate as part of a grander scheme to move out of emergency measures and in to normalization. However markets have not been expecting the move to be so quick and were caught by surprise. Although the Fed in its decision went out of its way to outline this is only a move towards normalization rather than a tightening move investors thought differently.

President Obama took the stand yesterday, commenting on his recent stimulus package. Already a year has passed since the President began to inject funds into the financial system to reduce the recession’s impact. According to his statement, even though unemployment is at high levels, the stimulus helped to prevent over 2 million job losses. President Obama claimed that the stimulus plan is on target to create or save a total of 3.5 million jobs.

Sterling traded rather stable in recent days as upbeat UK inflation figures and EU credit woes shifted selling pressure to the Euro. The cable bottomed around 1.553 against the Dollar and settled around 0.87 against the Euro. Although the Sterling has been rather exposed to selling pressures not so long ago the recent elevated figures spurred investors bets that UK inflation could crawl in faster than anticipated and bring tightening closer. The CPI figures published this week stud at 3.5% YoY a 1.5% above the BoE target and higher than investors’ consensus. In fact this is the second CPI figure in a row that majorly outpaces the expectations of both policy makers and investors alike. The BoE governor Marvin King in his letter to the government laid inflation prospects as subdued stressing that UK industrial over capacity will curb inflation towards the mid of 2010.The Governor reiterated that risk for the UK economy remains to the downside and did not rule out additional quantitative easing to support the economy in case of another deterioration but most importantly sealed his reference to  inflation by stressing that in case mid-long term inflation prospect will rise above the BoE target of 2% the committee will move to tighten monetary conditions.