Don't be fooled. The markets may be higher today, but there is just as much "risk" out there as there was last week. Stocks have followed on from Friday's rally. Eurostoxx are still booming from the news about the ban on short-selling financial stocks that came into play on Friday, the Dax is higher by nearly 2 per cent and the FTSE 100 is up nearly 1 per cent.

The big moves however have taken place in FX, and primarily in the Swiss crosses. USDCHF is touching 0.8000, 11 per cent higher than a week ago, and EURCHF has recovered from near parity last week to above 1.1350 as we start this week. The Swiss central bank the SNB will not rest until the relentless buying pressure on its currency has come to a halt. It doesn't want to be a safe haven and is reportedly considering 1, lowering interest rates to below 0%, pegging its currency to the euro or implementing an exchange rate floor if weekend reports are to be believed. The market is taking these threats from the SNB seriously and the franc has been the largest mover so far today.

Although Japan is unhappy with the level of the yen, so far its intervention methods have not had such a large reaction on currency markets. USDJPY remains below 77.00 and EURJPY is hovering around 110.00. The Japanese finance minister continues to complain about the level of the yen but so far has not hinted that more direct action in the FX market is imminent. However, intervention risk is a major barrier to further appreciation of the safe haven currencies in our view and should not be overlooked. As we have found out in recent weeks central banks don't need to give much warning when they act.

The other big intervention risk is the European Central Bank. Later today we will find out how much it spent buying Italian and Spanish bonds last week. Due to the large moves in these bond markets one can expect that the ECB's purchases were sizable. But more important for the markets will be signals from the ECB that it will continue to use its financial fire power to back stop these credit markets. The markets want the ECB to morph into a Fed/ BOE who is willing to extend the size of its balance sheet in the name of financial market stability. So far the ECB has been unwilling to do this, instead concentrating on its mandate to provide price stability. If we see inflation pressures start to abate - Brent crude has fallen more than 7 per cent this month - then the ECB may escalate its role in stabilising Europe's battered sovereign debt markets.

Tomorrow's meeting between Angela Merkel and Nicholas Sarkozy will also be pivotal for the markets. Both sides have denied that a common euro-bond will be discussed, let alone approved, but increasingly this is looking like the only solution to this crisis. We think both "leaders" of the Eurozone will discuss closer economic union, but will stop short of discussing fiscal union. The markets thus may well be disappointed.

Europe's problems remain hard to solve and we are no closer to a resolution, which is likely to keep the pressure on risky assets for some time to come and we would expect further and more frequent flare ups in this crisis for the rest of this year. Growth fears have also hit market sentiment. This week's data releases will be pivotal to help markets decide if we are one step away from a double-dip recession or if growth will remain positive but frustratingly sluggish (at this stage a better outcome for risky assets).

Today's Empire manufacturing will be closely watched in the US due to its relationship with the ISM manufacturing index that is closely correlated to growth. US CPI will also be pivotal. Core inflation is expected to have risen to 1.7% last month, which may impact the prospects of further QE from the Fed. When QE2 was announced last year core inflation was a weak 0.6%, it is now closer to the 2% target, which leaves the Fed less room to pump the economy with more dollars. In the past the markets have been able to rely on central banks to help ward off threats to growth, this time round central banks are out of ammunition and we may have to cope with a recession or slowdown head on, without any help from central bankers. This has spooked markets, and any further signs that central banks won't be there to help the markets get out of a dark corner could dent fragile investor sentiment.

There was one growth "surprise". Japan's Q2 GDP figure was not as bad as expected. Growth contracted by 1.3% on an annualised basis, better than the 2.5% expected. This was due to a quicker improvement in the supply chain after the March earthquake. However, Q3 GDP may be impacted by the strength of the yen that has hurt Japanese exports.

Data Watch:
United States 13:30BST (0830 ET) Empire Manufacturing (Aug) index 0.00 EXP, -3.76 LAST
United States 14:00BST (0900 ET) Net Long-term TIC Flows (Jun) USD bn 32.6BN EXP, 23.6BN LAST
Euro Area 14:30BST (0930 ET) ECB Announces Bond Purchases
United States 15:00BST (1000 ET) NAHB Housing Market Index (Aug) index 15 EXP, 15 LAST
United States 18:25BST (1325 ET) Fed's Lockhart Speaks

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Best Regards,

Kathleen Brooks| Research Director UK EMEA | FOREX.com

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