MarketWatch November 15 - 19, 2010

Good news on the domestic front breathed some life into the Dow this week. The new (and, it appears, improved) General Motors came to market to shed much of its taxpayer ownership. Market interest in its initial public offering (IPO) was strong and, hopefully, the taxpayer can now take a backseat as long as GM continues to return profitably to the private sector. 
China has also been in the news. To cool off what many consider a potentially overheated economy, China’s central bank announced for the second time in two weeks that it would tighten its financial sector reserve requirements. Some U.S. market observers attributed a less buoyant U.S. stock market today to smaller capital flows from China as its banks increased reserves at home.
And then there’s the Fed. As the Fed has stepped up its purchases of Treasury debt (in its second round of quantitative easing, announced in early November), interest rates for debt of longer maturities have gone up. Over the past week, many Fed officials gave speeches explaining and defending the Fed’s moves. According to one of these speeches, such a shift may indicate that the Fed is succeeding in its goal to increase inflationary expectations slightly, so that the U.S. economy does not sink into deflation.
Coming from the other side of the Atlantic, spillover from the Irish debt crisis into U.S. markets has diminished, at least for the time being – but global investors are watching developments closely. Safe haven demand for the dollar and U.S. Treasury bonds have subsided as it appears more likely that the Irish government will agree on a fiscal rescue and recovery package backed by the deep pockets of the International Monetary Fund and (it appears) the EU governments. The recent stunning deterioration of the Irish fiscal position is directly related to the state of its financial sector, which had played a central role in Ireland’s housing bubble. Other EU countries are being closely watched as they continue to struggle with their fiscal problems. (Over the past week, Greece, Spain and Portugal were in the fiscal news.)
However, dark clouds moved in from another direction, as focus shifted to state and local bonds over the past week. For a start, the State of California’s financial woes are once again in the news. Investor worries about California’s ability to manage its fiscal problems has led to higher interest rates the state must pay to get short-term financing.  More broadly, however, tax-exempt municipal bonds have been under pressure for the past week, although they had stabilized as of midday today. It is not clear the extent to which negative market sentiment has reflected concerns with fundamentals or other factors (such as the possible end of relevant stimulus-related programs).