Risk appetite was pared down during the Asian session as investors chose to focus on Fed Chairman Bernanke's dovish comments. Bernanke's semiannual report to Congress basically reiterated the position reported in the FOMC minutes and policy speeches. However, the markets seemed to have latched on the words we recognize that the economic outlook remains unusually uncertain.
We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed. That statement sent a rush of capital back to recent safe havens in the US dollar, Swiss Franc and Japanese Yen. Just as USD, CHF and JPY all received their boost, US yields & equities dropped like a stone with 10y yields falling 10bp as the chairman spoke.
As Europeans sat down at their collective desks this morning, the merits of the stress test are now being hotly debated. The chasm emerging between proponents and opponents is considerable. On one side are EU officials who believe everything will be repaired by this magical report and on the other side is the real market, which remains overall skeptical and unconvinced. For those that have been reading our reports for the last two weeks, we firmly remain in the skeptical camp.
One of the CNBC anchors summed up our opinion best when speaking to a Greek finance official declaring that if Greek banks pass, the stress test fails. The increased dialog surrounding this issue is obviously due to the proximity of the data release, further amplified by the Wall Street Journal's report that EU officials are looking to publish the results before tomorrow's European open rather than at its close.
This begs the question, if the regulators haven't even cemented questions regarding the distribution of their report, how confident can we feel in their thoroughness in analyzing complex balance sheets? The uncertainty and debate still surrounding this report is caustically eroding confidence. We still hold that the stress test will not provide the transparency needed, will not build nor shore up confidence in the EU and will leave us with more questions than answers.
In the UK, BoE MPC minutes revealed a 7-1 vote in favor of an unchanged policy rate with Andrew Sentance being the lone dissenter...again. The committee further voted unanimously to hold the QE program unchanged at £200 bn. There was a discussion of increasing QE easing, however no member actually voted for the move. BoE Governor Mervyn King still believes that inflation will continue to ease as growth is expected to deteriorate a bit further. Given these developments, we suspect the sterling will continue to come under selling pressure as the risk is now skewed towards policymakers opting to hold rates steady longer than the market currently expects.
Over the past few days, CAD remains the relative outperformer in the FX market. Canadian retail sales and their Monetary Policy Report are due out today and we believe that growth expectations will continue to be adjusted to the upside - giving the CAD even further support.
Today's Key Issues (time in GMT): 08:30 GBP Jun retail sales, +0.5% m/m, +1.0% exp; last +0.6%, +2.2%. 09:00 EUR May ind new orders, unch m/m, +20.2% y/y exp; last +0.9%, +22.1%. 13:30 USD FOMC Chair Bernanke semi-annual House testimony 14:00 EUR Jul consumer confidence index; last -17. 14:00 USD Existing home sales, mn saar 5.20 exp 14:00 USD Leading indicators index, % m/m Jun -0.3 exp 15:00 ZAR South Africa: Interest rate announcement, % Jul 6.50% 14:30 CAD BoC Monetary Policy Report.