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Risk Sentiment Shows Slow Improvements on Positive Macro Data; Central Banks Continue with Intervention Rhetoric

Risk assets rallied yesterday but have given back some of the gains as volumes and volatility leveled off overnight. Activity during the European session will give the best indication for how the week will close after positive macro data from the region brought some buyers back into the European banking stocks. The main headlines came with US weekly jobless claims, which dropped to 395,000 for the week and the ban on short selling banking stocks enacted in France, Italy and Spain. Yesterday, the S & P 500 closed 4.63% higher, but Asian stock markets didnt follow this lead. The EUR/USD is flattening out at 1.4170-1.4260 while the USD/JPY continues to be weighed down at 76.75-77.00. Macro data today will come in the form of US retail sales and the Michigan confidence survey. An ECB Governing Council member (Mersch) released a statement today explaining that the ECB is considering a shift in its inflation bias (from higher to neutral) on the argument that declines in energy prices and metals will bring a balance to consumer prices. He said that the probability of a European recession is low and that the worst of the market turmoil has passed. The Swiss Franc continues to be one of the most heavily discussed assets as intervention rhetoric brought some weakness to the currency after reaching all time highs. Swiss National Bank currency swap transactions will be an important gauge going forward for determining the SNB bias toward enacting quantitative easing measures. An increase in foreign exchange swap transactions would suggest a bias toward enacting QE. In Japan, similar rhetoric is still being voiced but the difference now is that the Finance Minister (Noda) has started to suggest that currency intervention might not be unilateral and instead a coordinated action from the G7. What is missing from the rhetoric is a confirmation from other G7 members that this is a real possibility so, at the moment, markets are ignoring the comments and pushing the Yen again toward record highs against the Dollar. Volatility has slowed in recent sessions but traders should remember that this could change at any time and that extreme price swings do have the potential to occur without notice.

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