Markets Overview: (Source: Bloomberg, FT, Reuters, DJ Newswires

UK 100 called to open -25pts after the US Federal Reserve (Fed) disappointed markets last night by announcing only a sentiment-denting extension to its ‘Operation Twist’ (bring long-term borrowing costs/yields down by selling short-term bonds and buying long-term bonds) until the end of the year – an unconvincing response in the eyes of many.

This was in contrast to hopes for more Quantitative Easing (QE, printing new money, devaluing existing money) and in spite of the Fed reducing its US economic growth forecasts based on recent weak macro data (unemployment, spending).  QE3 has not been ruled out – the door is still open – should the macro landscape deteriorate further (read US, Europe, China) suggesting potential for an announcement in the month(s) to come. Same situation as the Bank of England (BoE) it would seem.

Overnight, more gloom from China with the HSBC Flash PMI Manufacturing survey falling to a seven-month low and increasing the worries regarding China’s slowdown and potential for a hard landing of the emerging alternative world growth economy.

Bothe the China and Fed news has brought the UK flagship index back to its levels of yesterday afternoon where optimism was rising regarding the possibility that Europe would allow intervention in the sovereign bond markets to stabilise the market borrowing costs of Spain and Italy. Germany still fundamentally against it; “If you need help, it’s a bailout or nothing”. But Merkel between a rock and a hard place – open purse and pay to save Eurozone, or watch single-currency bloc crumble and go down in history as not doing enough. She may have to surrender.

Good news also from Greece that it had managed to form a coalition government. Pretty quickly – good sign. All eyes now on Eurozone summit next week (Mexico G20 already forgotten!) where Greece will have new representation. Before that though, we have the first results of Spain’s beleaguered banking sector audit. This could throw spanner in works if found that €100bn request for aid is not enough. Bonds likely to react to express sentiment over the nation’s ability to sort itself out. Watch the bond auction later.

Looking to FX and commodities, USD stronger vs GBP overnight on lack of QE news from the Fed. Against the EUR, after initially strengthening, USD has weakened since China’s overnight PMI data. GBP continued to weaken versus EUR from yesterday on prospect of more QE from Bank of England (BoE) next month. Commodities also active, with Gold making big moves around the Fed announcement with a range of $1590-1620. Since fallen back to $1600 overnight. Oils both US light crude and Brent both weak on US inventory build yesterday and the weak macro data from China.

Macro data this morning likely focused on Spain’s banking report (potential touch paper for eurozone crisis) and its 2-5yr bond auction (how much will it have to pay?), PMI data from Germany and the Eurozone (seen stable) along with UK retail sales (seen rebounding). This afternoon, US Jobless (stagnant) and US Existing Home sales (slight decline).

Overnight Macro Data: (Source: Reuters/DJ Newswires)

• China               HSBC PMI Manufacturing       Declines to 7-month low
• See Live Macro calendar for all details

UK Company Headlines: (Source: Reuters/DJ Newswires)

• Dixons says makes good start to new year
• Ashtead raises expectations as profit soars
• Go-Ahead sees tough 2012/13 for rail unit
• Wood Group’s Mustang unit wins contract with Shell in U.S.
• Shanta Gold says mine on track to start output in Q3
• Sirius Petroleum says working on two farm-ins in Nigeria
• Invensys says Emerson talks failed
• Providence Resources sees revision of resource update at Barryroe
• Synergy Health says class action lawsuit against SRI ‘without merit’
• Fairpoint sees year profit beating market view
• Micro Focus Intl year profit +30%
• Amec in collaboration deal with Norway’s Aibel

Morning Press Selection:

• Bailout fund should buy euro debt – FT.com – EU Economy http://on.ft.com/LkAIqe
• Merkel ambushed by crisis lectures at G20 – FT.com – EU Economy http://on.ft.com/KO28Xx
• Fresh signs of weakness in Chinese economy – FT.com – Asia-Pacific http://on.ft.com/LhEBy4
• Italy, Spain and EU bond purchase schemes | Brussels blog | FT.com http://on.ft.com/LC5kEV
• US Fed opts to extend Operation Twist – FT.com – US Politics & Policy http://on.ft.com/KkTB8d
• Forget Grexit, it’s time to fret about ‘Chindown’ – FT.com – Columnists http://on.ft.com/NTvEMg
• Don’t count on Germany’s economic surrender – FT.com – Opinion http://on.ft.com/NUfv9s