The final trading day of 2009 has kicked off with a strong equity market performance across Asia (Hang Seng +1.75%, Shanghai Composite +0.45%); sealing the biggest annual gain for Asian stocks since 2003. The rally in equity markets globally has been extremely impressive in the past 12 months; with the MSCI World Index set for a 27% annual gain, and benchmark indices for the BRIC economies up by even more astonishing figures; Brazil’s Bovespa +82.7%, Russia’s RTS +127.1%, India’s Sensex +81.7%, China’s Shanghai Composite +80.0%.

Of course, looking through this euphoric gain, the longer term investor will point out that this is the first decade in history that the S&P will close down (31 Dec 1999 close: 1469.25, yesterday’s close: 1126.42), serving as a strong reminder of the sheer magnitude of the financial crisis that we are still recovering from. Policymakers and investors alike will be looking to 2010 to confirm that the threat of a double-dip recession is vanquished, and crucial to that will be a steady improvement in US data (particularly employment) and continued demand from China. The demons lurking in the wings will of course be the enormous budget deficits that governments have accumulated in fending off the recession thus far; and we have already seen the cracks that have started to appear in the form of credit rating downgrades to Greece, Ireland and Dubai.

Japan is another economy walking a fine line between maintaining its sovereign debt rating and possible downgrades, as the glut of JGB issuance extends beyond Y44trn. We have highlighted a number of times the mounting arguments for the JPY to be a significant laggard in 2010 – especially if the rest of the world manages to sustain their current momentum of recovery.   Returning our focus to the remainder of 2009, the thin liquidity combined with month-end, quarter-end and year-end are will make for unpredictable and choppy trading conditions across the majors and EM pairs.

Confirming the range-bound price action of the prior few weeks, the USD has conceded some of its recently daily gains this morning, on very little fundamental stimulus. If anything, USD sentiment should be boosted by yesterday’s impressive jump in the Chicago Purchasing Managers’ Index which hit 60.0 in December – against forecasts for the number to decline to 55.1 from last month’s 56.1. The sole item on the economic calendar for the remainder of the day will be US claims, but for FX markets the emphasis will be on fixing orders later in the day as asset managers rebalance their portfolios.

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