The substance and meaning of Friday's Stress test results are still be hotly debated. Financial pundits are putting enormous emphasis on the European open as the barometer of the market's sudden confidence in the results. We are still unconvinced about the stress tests and doubt that a single market open/trading day will create the directional rush some participants are looking for. FX markets initially took on risk in Asia but the gains were quickly eroded.

Seven of the EU banks, out of a total of 91, failed the stress test. The test did not find any troubled institutions in countries such as Italy and Portugal and just one in Greece. Of the banks that did fail, they only needed to 3 million Euros to meet their Tier-1 capital ratio of 6%, quite a low figure for major banks. The EU's widespread denial of the possibility of a sovereign default is vexing to analysts, but it's understandable from a political and market stability standpoint.

Overall, if the purpose of this test was to gauge the probability of a sudden bank collapse in the EU, than it misses the mark. We maintain the view that Europe's problems are largely structural and thus no test will address these problems. The macroeconomic assumptions used in the adverse scenarios were not very difficult nor believable. Ireland's GDP growing 1% is not an emergency scenario. 

Markets will continue to watch LIBOR and credit-default swap spreads carefully as well as the equity markets' reactions - especially to see which banks come under heavy selling pressure.

The Euro's strength is limited as domestic growth prospects will diminish as the austerity measures kick in. Global growth is still decelerating and the credibility of the single currency has been damaged in recent years. In addition, we have our eye on the Swiss Franc to outperform across the board. The Swiss version of the stress test, released Friday prior to the EU test, was more rigorous and comprehensive. With the added scrutiny, market participants can be confident in Switzerland's banking sector. We suspect capital will continue to flow from Europe, into Switzerland, as investors seek out a safe haven for their assets.

We are still very impressed with the UK growth figures released last Friday. Q2 GDP figures came in well ahead of expectations at 1.1% q/q and 1.6% y/y, ahead of the 0.6% q/q & 1.1% y/y expectations. While PMC member Posen has raised the question of further QE to prevent the UK's economy from taking another dip, we are leaning more to the views of Sentence that inflationary pressure needs to be tackled now. We will be watching for the opportunity to go Long sterling, especially in the EURGBP.

Today's final thought is on the Yen. There has been a noticeable lack of rhetoric surrounding its recent strength. The current government coalition believes that markets themselves should set prices, even though there has been no noticeable erosion in exports (June exports increased a whopping 27.7% y/y). This week's June CPI will be in negative territory and we believe it's only a matter of time until Japanese rhetoric begins and we see the Yen lose ground. Forex-Chart

Today's Key Issues (time in GMT): 07:30 SEK Jun trade balance; last SEK2.7 bln surplus. 07:30 GBP Details of UK financial supervision reform. 14:00 USD Jun new home sales, 335k AR eyed; last 300k. 00:00 PLN Interest rate announcement, % 3.50 exp/prior