US markets headed higher this week, as investors put money into equity funds. On Friday, the Dow rose 73.11 points or 0.59% to 12,391.25, while the S&P 500 gained 2.58 points or 0.19% to 1,343.01. For the week, the S&P 500 and Dow both rose 1%.
According to Thomson Reuters Lipper, US$8 billion entered US equity funds in the week ending February 16. While many market watchers have been calling for a correction, the markets have continue to head higher, though volume has been falling in recent weeks.
China raises RRR
China announced a January CPI of 4.9% on Wednesday, lower than the 5% that economists expected. On Saturday, the Bank of China raised the reserve requirement ratio (RRR) of banks by 0.5%. It was only 10 days after the central bank raised interest rates, and it was the 8th increase in the RRR since the beginning of 2010. The new RRR for large banks will be 19.5%, effective Thursday.
Troubles continue in Europe
Early this week, UK's January CPI was reported at 4%, which is twice the country's target and 0.3% higher than December's 3.7%. With weak economic growth and high inflation, stagflation is a possibility for the UK.
The euro zone also reported 4th quarter 2010 GDP, with the region posting a growth of 0.3%. However, Greece's 4th quarter GDP decreased 1.4%, while Portugal's fell by 0.3%. On Friday, the yield on 5-year Portuguese government debt also hit a record high, since a bailout for Portugal is inevitable.
Gold and silver shine
After correcting 7% in January and not recording any gains earlier this month, gold has started to break out this week. Spot gold gained 3% this week, after recording 5 straight days of gains. On Friday, it reached a 5-week high of US$1,391.75.
Looking ahead to next week
With China announcing another increase in its RRR 10 days after its interest rate hike, commodities will certainly take a hit. Commodities have risen significantly since late August, so a strong effort by emerging markets to cool their economies can send prices into a correction.
Problems in the euro zone also have not gone away. While investors have shifted their attention away from the region since Portugal auctioned off 10-year bonds at 6.7% several weeks ago, leaders in the euro zone have not decided on a plan to solve their debt crisis.
Unrest is also aplenty in the Middle East, with mass protests in Bahrain, Iran and Libya. Thus, investors can expected markets to either head sideways or begin a correction this coming week.