Expectations of central bank intervention inspire global risk rally

Once again, expectations of intervention by European leaders has led to a significant bounce across global markets. On Thursday, European Central Bank President, Mario Draghi's vowed to "to do whatever it takes to preserve the euro," inspiring a material shift in sentiment, which was echoed by German Chancellor Angela Merkel and French President Francois Hollande in a joint statement on Friday. Still, history suggests this united exterior may only have a limited impact, unless leaders can convince markets their words can be backed-up by concrete action, and fast. It's clear, markets have priced in a grand effort by Europe's elite, which is expected to involve further ECB intervention to bring down borrowing costs in Europe's periphery, while the possibility of additional funding for Europe's bailout fund, the European Stability Mechanism, has also underpinned gains. Critically, markets are in high expectancy mode, suggesting an imminent need for follow-through to transform this tentative rally into meaningful change in trajectory. These same implications exist across the Atlantic with investors hopeful of near-term intervention from the U.S Federal Reserve. Stimulus hopes have - in part - encouraged strength from U.S equity markets last week, with the DOW Jones crossing the psychological milestone of 13,000 for the first time since early May. In economic news, advanced estimates released by United States Department of Commerce showed U.S growth increased at an annual rate of 1.5 percent in the second-quarter, significantly lower from first-quarter growth of 2 percent. The finer points of the data show the decline was led by a drop in private capital expenditure and government spending, while rising imports subtracted from overall growth.

U.S dollar falls amid global easing expectations; FOMC and jobs to define the trend

The U.S week ahead will once again see stimulus expectations govern the greenback's fortunes, with the FOMC rate decision a critical mid-week directive. While interest rates will remain at record lows, the key driver will undoubtedly be tied to likelihood of further stimulus, or indeed if the Fed decide take the plunge and embark on a third round of quantitative easing. The stakes are high and any reluctance displayed from the Fed is likely to place significant burden on global sentiment and provide a twofold boost for the greenback, given its inverse relationship to stimulus and its safe-haven attributes. Acutely aware of these expectations, the Fed will at the very least need to display a willingness to embark on such easing initiatives to keep the status quo. The effectiveness of further stimulus will also be brought into question given borrowing rates are at record lows. This suggests that while QE3 may provide a superficial boost or short-term sense of euphoria for markets, it's unlikely to directly influence structural issues such as the high rate of unemployment and weakness in the housing sector. With U.S mortgage rates in some cases as low as the 3-4 percent region, it's clearly never been a more cost effective time to borrow, however, given the housing bubble and subsequent global economic crisis, high unemployment and low credit worthiness has made the dream of owning a home illusive for many U.S citizens as lenders maintain conservative risk profiles. The health of U.S employment will once again be put under the microscope this week with Non-farm payrolls on Friday's docket. The U.S economy is expected to have created 100,000 jobs in July, slightly higher than the 80,000 recorded in June, while the official unemployment rate is expected to remain at 8.2 percent. Once again, this piece of top-tier data will be a critical directive for markets given Fed members have displayed a willingness to pull the stimulus trigger should employment growth remain subdued. Jobs related data points may sway market expectations in the lead up, with ADP employment change, Challenger job cuts, and weekly jobless claims due for release ahead of Friday's main event. The health of U.S manufacturing will also be in the spotlight with ISM Manufacturing Index on Wednesday and Factory orders on Thursday.

ECB under the pump as Draghi vows "to do whatever it takes"

Among a host of top-tier data points, a key focus for markets will be Thursday's European Central Bank rate decision. While a follow up the quarter-point rate cut earlier this month may not be fully priced in, it's clear the ECB have a lot to live up to. The ECB may decide to resume its bond buying operation and/or further LTRO purchases, in an effort to reduce borrowing costs and spur bank-to-bank lending. Also on the cards is a possible reduction of the rate the ECB pays on overnight deposits to encourage bank-to-bank lending and dissuade banks from side-lining capital. Whatever the result, like Europe's counterpart across the Atlantic, the stakes are high and the already vulnerable Euro may take the brunt if leaders fail to deliver. Reports that ECB President Mario Draghi will meet with Bundesbank President Jens Weidmann this week, suggest an attempt to gain German support ahead the ECB's policy meeting. Germany has in the past been staunchly opposed to easing initiatives such as peripheral bond purchases.   

Global intervention critical to A$ strength

Local data points will take a back seat to significant event risk abroad this week, with the aforementioned U.S and Euro-Zone interest rates decisions likely to govern risk sentiment, and by default the Australian dollar. On balance, local factors have been a positive backdrop for the Aussie dollar, but the leading directive remains headline risk abroad and stimulus expectations from both the Euro area and United States. The local unit finished the week one-percent higher, clawing back losses after a near two-percent slump mid week. The domestic week ahead will see the focus turn to Thursday's trade balance and retail sales data, with a number of less influential releases earlier in the week. True to form, feedback from the U.S will remain a dominate force with both FOMC meeting and Non-farm payrolls release to determine where the balance of risks should fall. Whatever the week may bring, forecasts for the A$ have rarely been so varied, given its reactive nature to economic policy abroad and strong ties to China growth expectations. China will remain a key influence this week with manufacturing PMI due for release on Wednesday, alongside the HSBC manufacturing gauge. Both the official and HSBC services PMI data will also be released on Friday.

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