China's surprising failure to raise interest rates at the weekend boosted risk appetite with commodity stocks with the oil and gas sector leading the way higher. The inflation outlook, however suggests we could be quite close to a rate hike in the near future, especially with inflation running at 5.1%. With key indices S&P 500, Dow Jones and the FTSE all posting two-year highs last week, we may see risk appetite tempered as we head into the rest of the year.

Positive economic data out of the US helped buoy the markets, with weekly jobless claims coming in as expected at 420,000 and retail sales for November rising above expectations by 0.8% while October's figure was also revised upward to 1.7% from a previous 1.2%.

Mining stocks pushed higher with Kazakhmys, Antofagasta and silver miner Fresnillo leading the way. M&A activity has also played its part, with British oilfield services company Wellstream Holdings jumping higher after US firm General Electric announced it wanted to buy the company for £800m.

Stateside, PC maker Dell announced it is buying internet data storage firm Compellant Technologies for $960m after failing in its bid for 3Par earlier this year.

BP saw its share price rise on the back of the sale of its oilfields in Pakistan to United Energy Group for $775m as well as being buoyed by a bullish update from Credit Suisse. Total asset sales this year have been in excess of $20bn as it looks to pay for the Gulf of Mexico oil spill. While the US government's decision to sue the company, as well as its partners, for damages as a result of the Deepwater Horizon oil spill saw the share price slip slightly lower, it was still only just below its highest levels for more than six months.

Euro/Dollar

The announcement by credit ratings agency Moody's that the latest US tax package increased the likelihood of a negative outlook on the US AAA rating in two years put the skids under the dollar, sending it to a three-week low against the euro. However the rally turned out to be unsustainable. The single currency now looks set to test back towards the $1.317 lows of last week.

Euro/Sterling

The year-on-year Consumer Price Index figure for November pushed up to 3.3% from last month's 3.2%, thus minimising the possibility of a resumption of quantitive in the near future. Despite this, the pound slipped back, beleaguered by the purchasing of nearly €2.7bn worth of peripheral sovereign bonds last week by the ECB. It will be increasing its capital base by €5bn to €10.76bn over the next three years in order to fund its ability to purchase eurozone peripheral debt.

The short squeeze continues to top out around 0.8548p, but despite pushing above the 200-day MA at 0.8525p it has failed to close above it, which keeps the bearish bias intact. Until such times as the market is able to close above the 0.8525p level then the downside scenario should remain intact.

A break below the November lows at 0.833p could then open up the possibility of a move towards trend line support from the 0.8065p lows at 0.8295p.

Oil

Crude-oil prices have traded sideways between $87 and $90 over the past few days after Opec left its production quotas unchanged over the weekend. The stronger dollar and tame inflation data pressured demand for oil but the decline in weekly inventory data, the biggest in nine years, has seen the crude price recover off its lows and go back above $88 bbl.

Commodities

Record commodity prices were the order of the week with copper prices making new all-time highs near $4.22 on the weaker dollar but have since fallen back on the slightly more positive US data.

Cotton continues to gain on supply concerns as indications grow that India may not have hit its cotton export target. Gold prices have declined below the $1,400 mark as the stronger dollar eroded bullion's appeal.

Brenda Kelly and Michael Hewson, CMC Markets