Market sentiment improved modestly as US economic data turned out to be better than expected. ISM non-manufacturing index improved to 54.3 in July, compared with consensus of a drop to 53.3, from 53.8 a month ago. The employment component climbed to 50.9, the highest since December 2007 while the new orders component rose to 56.7 from 54.4 in June. At the same time, ADP employment increased +42K in July after a +13K addition in June.

The market had anticipated a milder gain of +36K. These readings boosted market optimism on the employment report which will be released tomorrow. Current market forecast is that the US lost -75K in non-farm payrolls with the jobless rate rising to 9.6% (from 9.5%) in July.

Wall Street was a tad higher with the DJIA and S&P 500 Indices rising +0.4% and +0.6% respectively. Commodities strengthened but gains were pared as the dollar soared against the euro and Japanese yen. WTI crude oil surged to as high as 82.97 in NY session after the encouraging US data and bigger-than-expected decline in crude oil inventory. Price then retreated and ended flat at 82.47 as Cushing stock and fuel inventories rose, and as firmness in USD reduced commodity demand.

Gold rallied to a 3-week high at 1205.5 at one point but gains were pared as investors took profits after a 6-day rise. The benchmark contract ended eventually settled at 1195.9, up +0.71%. Base metals were firm with LME copper for 3-month delivery hitting at 3-month high at 7527 before closing at 7505 yesterday.

The market largely ignored Bloomberg's news citing unidentified person that the China Banking Regulatory Commission asked banks to conduct a new round of stress tests last month. The tests aim to gauge the impact of a 50-60% decline in residential property prices on the economy. Stress tests carried out in the past year assumed home-price declines of as much as 30%.

Interpretations of the rumor vary but economists in general do not expect property prices to fall by -60%. Some said the government may want to use the tests to demonstrate soundness of the banking system even with a sharp price fall. While it's uncertain if the new tests imply further tightening measures from the government, the impacts on the metal market should be negative if that's the case.

The impacts on gold are unclear. While worries over economic slowdown and uncertainty should drive demand for safe-haven investments, a broad-based decline in commodity prices and fear of deflation may threaten the yellow metal.

The ECB and the BOE will meet to discuss about monetary policy. While it's widely expected that both central banks will leave their policy rates unchanged (ECB: 1%, BOE: 0.5%), the focus is on the economic and monetary outlooks.

Recent economic data have shown that Eurozone's economic recovery has gathered momentum and the positive stress test results have eased concerns over the region's banking system, the market has began to speculate ECB will resume scale-back to the unlimited liquidity pumped to the market. While we expect questions of this kind at the press conference, the ECB statement should reiterate current levels of interest rates are 'appropriate' and 'the 'risks to the economic outlook are broadly balanced, in an environment of high uncertainty'.

The BOE will very likely keep the policy rate at 0.5% and maintain the asset purchase program at 200B pound. We will not feel surprised to see more members dissent the stance, arguing for an earlier rate hike after a strong 2Q10 GDP growth and still-elevated inflation. Andrew Sentence, a voting member has favored an increase of the policy rate by +25 bps since the June meeting as 'economic conditions had improved over the past twelve months and the inflation outlook had shifted sufficiently to justify beginning to raise interest rates gradually'.