… on Christmas Day.

Last time rates were raised, it led to a highly correlated sell-off in all the current trends, and therefore hit my returns quite hard. What will happen this time? Have the markets priced in further rate hikes and got over the surprise (economists have been forecasting further rate increases in 2011), or had they come to believe that the Chinese would mainly rely on other tightening measures and further rate hikes were unlikely, in which case this move could turn the markets around?

Logically, this move should not derail the markets. The surprise in November was twofold: inflation was a little higher than expected, and the Chinese authorities seemed more determined to fight it than they had been before. Now, another high inflation number (5.1%) and another rate hike suggest that the Chinese remain in tightening mode – i.e. no change – and their tightening so far has not been very effective, so the boom should continue (as I expected – it takes a lot to kill a leveraged boom, and the Chinese do not yet have the will to do a lot). However, markets are not governed by logic; this is a rate hike, and sooner than expected. That sentence alone may be enough to give us another irritating sell-off, followed by another unsurprising rally as the reality of China's boom continues to drive asset prices upward.