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Potential Chinese Loan Defaults hits Riskier Assets

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Potential Chinese Loan Defaults hits Riskier Assets

The positive sentiment market participants felt after the Department of Labor released a weaker than expected payroll report was reverse today as China reported news that there were increases in bad loans. The ECB reported Wednesday that they will start a process of review of banks in the EU, which will include trading operations and balance sheets.

On Tuesday, riskier assets continued to climb on the heels of a worse than expected payroll report. The report was delayed nearly 3-weeks because of the government shutdown. The BLS reported that non-farm payrolls increased by 148K jobs compared to the 180K expected by economists. The benign results allowed investors to perceive that the tapering of the bond purchase program would be put off until the middle of 2014, driving up the prices of stocks.

On Wednesday, the strength in the US dollar and weakness in equity bourses was driven by negative financial news from China. Concerns were ignited by press reports that China’s biggest banks tripled the amount of bad loans written off in the first half of the year. Additionally and article in the China Securities Journal reported new property curbs may be coming in the fourth quarter of 2013.

The Bank of England signaled on Wednesday that it may raise interest rates sooner than it had expected in August, after policy makers agreed the jobless rate in the U.K. is falling faster than they had anticipated.

Sterling was unable to break through the upper end of the range, topping out near 1.6250. Support is seen near the 10-day moving average at 1.6065 and an upward sloping trend line near 1.6030.

Momentum is positive despite the recent decline as the MACD (moving average convergence divergence) index generate a buy signal where the spread crossed above the 9-day moving average of the spread.

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