International markets failed to frank the optimism shown by the Australian stock market on Friday.

World markets appear to be taking this week’s Fed meeting seriously. While the Fed may not go as far as lifting its rate this week, it remains possible that it could move to a more explicit tightening bias. This would feed into market expectations that the post GFC era of global central bank stimulus is gradually ending

The overall tone of world markets at the moment is a bit fragile. The bond markets remain a key driver of sentiment. Having reached a recent low last Tuesday, US 10 year bond prices continue to trade nervously inside that day’s range. This is reflected in the US stock market. Although it stopped falling last week, it remains volatile and has been unable to move past last Monday’s high. Other signs of pre Fed nervousness include a stronger $US and soft gold prices. This morning, the Australian 10 year bond yield also hit its highest level in nearly 3 months.

This Fed related nervousness in international markets is likely to cap the optimism seen in the Australian market on Friday.

Reports that US authorities have an opening claim of $14bn for a settlement with Deutsche Bank  on mortgage backed securities may open up a second front of market risk aversion as traders are reminded of the underlying risks posed by the financial  fragility of some large European banks.