Financial markets firmed most of the day before receiving gloomy Chinese data showing continued weakness in the country's economy. In the commodity sector, crude oil prices initially climbed higher but then reversed gains amid news that Iran would allow inspection of suspected nuclear sites. This upstaged reports that Tropical Storm Isaac was heading towards the Gulf of Mexico. The front-month contract for WTI crude oil contract slipped -0.71% while the Brent crude contract dipped -1.17%. Gold also faltered below 1680 and ended the day at -1675.6, up +0.16%.
Sentiment was lifted during the US session as the Dallas Fed manufacturing index improved, though still negative, to -1.6 in August from -13.2 in July, while the Chicago Fed Midwest Manufacturing Index climbed +1.8% to 95.6 in August. Moreover, hopes of QE3 ere heightened as Chicago Fed President Charles Evans urged the Fed take immediate actions to drive economic growth. As a speech in Hong Kong, Evans stated that policymakers should not be "in a mode where we are waiting to see what the next few data releases bring...We are well past the threshold for additional action; we should take that action now". He suggested that the Fed should start buying bonds until it sees declines in the unemployment rate for 2-3 quarters
However, disappointing news from China brought about plunges in financial markets with the CSI300 plummeting to the lowest level since February 2009. China's industrial profits fell for a 4th month by-5.4% in July from a year ago, compared with the -1.7% drop in June. This has accelerated the need for further monetary easing from the government. Premier Wen Jiabao warned that "negative factors that will affect stable economic operations in the second half" and that the difficulties encountered in stabilizing growth will be "relatively large". While weakness in economic data should drive hopes of additional easing measures, investors were concerned as the PBOC has been slow in implementing new measures and previous tools proved to have little help to growth.
In Europe, German Finance Minister Wolfgang Schaeuble and French Finance Minister Pierre Moscovic announced that they have created a joint working group focusing on development of a banking union and promotion of stability in the Eurozone. Regarding the ECB bond purchases, Jorg Asmussen, a member of the ECB's Executive Board restated that "the ECB will only act in parallel with the European Financial Stability Facility and later the European Stability Mechanism". The program remains in the developmental stage and policymakers will discuss it at the upcoming ECB meeting.
On the dataflow, the US consumer confidence probably edged higher to 66 in August from 65.9 a month ago. The S&P/Case-Shiller Index probably slipped -0.2% in June after dropping -0.7% in the prior month.