Today markets were on a generally bullish footing, with bourses all around the world rallying strongly, yet this is not one of those days where speculators gobble up everything they can get their hands at, as the sovereign CDS market is showd some tension in the aftermath of rising uncertainty about the feasibility of the periphery's escape plans. Gold and EURUSD were both higher, while the USDJPY was volatile throughout the day, moving within a band in the prelude to the FOMC meeting. There the market favors at the moment the $500 billion point for QE2, so we can perhaps calculate the market impact of the decision on the basis of the miss from this imaginary level target.

The yuan sees another higher fixing, Chinese officials complain about bubbles, U.S. policy

The PBOC fixed the yuan rate at 6.6925 vs. yesterday's 6.6886, obviously in a bid to ensure that if the Fed does surprise the markets with a very aggressive QE plan, the fall of the renminbi will be from a higher level. We are certain that the Fed sooner or later will fulfill the expectations of its most determined critics, but it is hard to say what exactly they will be doing tomorrow. In any case, many are expecting to see a series of lower fixes in the USDCNY rate in the next few days and weeks provided that the Federal Reserve doesn't surprise us too much.

Li Daokui, an advisor to the PBOC, today was heard in a Beijing forum commenting that the central back should consider raising rates in order to counter the asset bubbles forming in the country. In his comments, he went a bit beyond the consensus in suggesting that the central bank should target and deflate asset bubbles before they become too big to be tackled safely.

In other news in Asia, the SGD rose to another record high vs. the dollar, after the RBA's interest rate decision, as the MAS allows the currency to appreciate in order to meet the strong inflation pressures at home. The yen was indecisive, as we noted previously, but its coming close to 80.20 yesterday was enough to compel the FM Noda to repeat the customary comments about watching the market closely and being ready for decisive action.

European sovereign CDS under pressure after weekend meeting

In a sign that the Fed-inspired optimism is helping the Eurozone as a whole, today's releases of the Spanish and Irish Manufacturing PMI's were both better than expected, coming at one point above the threshold 50 level, vs. September's weak readings around 49. The October PMI for the Eurozone as a whole was at 54.6 vs. 53.7, with reasonably strong readings in manufacturing output and employment. Needless to say Germany is leading the region by a large margin.

Notwithstanding these positive results, however, Irish CDS broke yet another record, reaching 505 bps by rising 7 points against Monday's 498 bps, which was itself an all-time high. Spreads between the 10-year bonds of Germany and Ireland also broke a record today. Clearly inspired by the behavior Angela Merkel and the French President, speculators are testing the waters to see how serious the duo are in proceeding with their awoved commitment to make the public sector share the pain. Some say that the Fed day is also having an impact, but that is not so clear since in other markets, the Fed's impact has generally been reflected in increased bullishness on risk.

The 3-month Euribor rate has stabilized around 1.45, and it is today higher by just a fraction at 1.047% vs. yesterday's 1.046%. While it may come bacl lower a little, or stagnate around these levels for now, we think that it is headed yet higher for the next months.

Australia raises interest rates

The Reserve Bank of Australia has decided to raise interest rates today by 25 bp to 4.75% in a move that caught markets in a surprise and made the AUD approach parity with the USD after gaining more than 1.10%, notwithstanding the slight cautiousness in the market about assuming positions before the FOMC decision is out. In the statement that was released with the rate deicision, the bank drew attention to the great improvement Australia's terms of trade as the currency and all its peers appreciate against the dollar, against the background of a commodity market buoyed by expectations about further easing by the Federal Reserve.

Analyst opinion was biased towards an unchanged rate decision after Q3 inflation data came slightly weaker than expected, but Australia's confident and independent central bank chose to act anyway, apparently in anticipation that there will no let-up to price pressures anytime soon with the Fed determined to keep the USD firmly on a downtrend. The surprise rise has greatly improved the market's attitude to the AUD, and now we, as well as many others, expect the currency to reach beyond parity, barring major shocks coming from the Eurozone or the Federal Reserve in the meantime.

The Federal Reserve's determination to ease is of course important, but the outcome of the Congress election is even more important on multiple levels. We'll get a hint about how upset those who are willing and determined to vote are with the Obama administrationin general, and the results will be significant for the US-China relationship, gold price, the dollar, and of course the future of the U.S. budget deficit Many of the candidates are untested, and often inexperienced people driven by ideology and beliefs rather than facts and pragmatism, but they may have well have a role in providing the decisive momentum for bringing the sluggish downtrend in the U.S. to its culmination.

Americans are unhappy, yet many are complacent, too. Those who are the least complacent are also those who are the angriest, which means that the mass of people most likely to head to ballot boxes soon are not the most sensible and logical ones that we would encounter in the U.S. Be it as it may, sometimes the rash and unpredictable actions of such individuals has the potential to break deadlocks and force events in not an altogether objectionable manner, and in the case of the U.S. it may well be that the fanatics that get elected to the Congress this time will show more wisdom in their decisions than they would ever intend.

We have the Congress election, and the FOMC meeting, as well as the NFP release this week, and for better or worse, many unknowns be uncovered rather soon. We'll update you as events progress.