U.S. equity markets declined during the week as consumer confidence lagged estimates and earnings reports failed to impress investors. Alcoa kicked off the December earnings announcements on a sour note, missing street expectations on higher costs – the stock was dragged 9% lower as a result. PC chipmaker, Intel, was another major company to report earnings. Intel delivered a strong beat and raised guidance on the back of strong laptop demand and record high gross margins. JPMorgan Chase & Co. was the first major U.S. bank to report, with results that disappointed investors as revenues trailed estimates and the retail bank reported a loss driven by higher bad debt provisions.

European equity markets turned into negative territory this week as Greece’s debt woes raised concerns. “Greece shouldn’t count on its European allies to bail the country out,” said Luxembourg’s Jean-Claude Juncker. In Germany, preliminary GDP reading for 2009 came in at -5.0% versus -4.8% expected, marking the sharpest contraction in activity recorded since WWII.

Asian equity markets were mixed last week as Chinese officials sent signals that they are willing to act on recent tough rhetoric about asset bubbles. The People’s Bank of China, the country’s central bank, surprised the market this week with an earlier than expected 25 basis point increase in banks’ reserve requirement ratios. Consensus expectations had been for this to happen no earlier than the second quarter of this year, but given increasingly tough talk from various government officials about asset bubbles, the early move was not totally unexpected. The change in reserve requirement ratios should drain some liquidity from the economy, but given the magnitude of the move, policy is still accommodative in China. We do not expect the government to tighten aggressively as CPI and PPI remains relatively subdued and global growth weak. Still, the message being sent is unmistakable – China’s government is vigilant and willing to act if asset prices inflate too quickly.

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