The rally in risk appetite boosted by strong Chinese and Australian data yesterday was further encouraged after our last article by stronger than expected US ISM numbers. Forex risk correlated currencies, such as the Euro, moved lock-in-step with the data. EURUSD rallied above 1.2800 and the S&P climb above 1080. However, US rates weren't invited to the party as players remained unsure - 10 yr yields did jump roughly 10 bps, but have since retraced

The divergence between equities and bond yields puts us in the corner that any risk rally may be just a short term correction until we get further information. Perhaps our greatest clarity surrounds the recent CHF strength and reconfirmed by today's Swiss real GDP, released early this morning which rose 0.9% q/q. Q1 growth was revised up to 1.0% q/q from the 0.4% q/q estimated earlier.

While a majority of the Swiss Franc's gains have been more on the back of safe-haven flows especially from the EU, the fundamentals of Switzerland will begin to give value to the underlying economics. The decoupling of a European economy from EU contagion fears is giving the CHF further strength. For those paranoid about the SNB, Hildebrand comment that if deflation risks reappear, we [the SNB] would try to respond... is not much to worry about in the short term. The slight downward slope in CPI is generally expected and not severe - making deflation not a big issue at this point, which should leave the SNB safely on the sidelines.

If any of our clients are trading the CHFHUF, the long trades driven by the massive borrowing of CHF to fund domestic denominated HUF purchases. Repayments from Hungray will continue to support the CHF, especially in an environment with growth fears and funding problems in Hungary.

Overall markets will continue to be hyper sensitive to data (any) and overreact to deviations, which will give traders plenty of headaches for the remainder of the week.

European session participants will be focused on the ECB rate decision today. Remember it was ultra hawk Axel Weber's surprise comments that radically shifted the discourse around the ECB monetary policy path. While its universally expected that no change in rates from 1.00% there is the chance that the ECB will extend their extraordinary measures. Trichet's press conference might provide some answers. We know that bank recapitalizations still remains a concern and while Q2 data was firm, there is serious concerns that the EU will follow the US lower (think German retail sales -0.3% m/m).

While Germany is the clear engine of EU growth, it doesn't have the strength (or political will) to pull all the peripheral laggards up. The divergence between economic data among EU nations(inflation and growth) is becoming palpable. Today's ECB press conference markets will be focused on any mention of renewed discussion of QE extension between members and comments on peripheral spread widening in the past month.

Today's Key Issues (time in GMT):
07:15 CHF Jul retail sales; last +0.9% y/y.
07:30 SEK Riksbank policy announcement, some eye 25 bp hike in repo rate to 0.75%
07:30 GBP Aug construction PMI, 53.2 eyed; last 58.4.
08:00 EUR ITA Jul PPI; last +0.2% m/m, +3.4% y/y.
09:00 EUR Q2 GDP - revised, no changes eyed; prelim +1.0% q/q, +1.7% y/y.
09:00 EUR Jul PPI, +0.3% m/m eyed; last +0.3% m/m, +3.0% y/y.
09:00 EUR ITA Jul trade balance - non-EU; last E1.064 bln deficit.
11:45 EUR ECB policy announcement, no change eyed in 1.0% refi rate.
12:30 EUR ECB Pres Trichet press conference.
12:30 USD Initial jobless claims, thous 473 prior
12:30 USD Productivity, -2.0 exp, -0.9 prior
13:00 USD FOMC Chair Bernanke testimony before Financial Crisis Inquiry
14:00 USD Factory orders, % 1.4 exp, -0.7 prior
14:00 USD Pending home sales, -1.0 exp, -2.6 prior