Risk Appetite Resilient After A Volatile Week

It was a rather strange but revealing week. Markets suffered much volatility on central bank disappointments, in particular ECB's lack of concrete actions. Economic data were also mixed. But the underlying strength in risk markets were impressively strong.

Despite intra-week setback, the Dow managed to close above 13000 level at 13096.17. S&P 500 continued its march to 1400 level. FTSE 100 also extended the short term uptrend to close at 5787. The Spanish 10-year yield dropped back below 7% after an intra-week spike. The Dollar Iindex closed lower after a brief rebound attempt while EUR/USD continued to stay well above 1.2 psychological level.

A couple of reasons could have helped trigger the late rally in risk markets. US nonfarm payrolls showed 163k growth in the job market in June, best number since February. RBS led financial stocks higher after solid earnings. Also, it's reported that the ECB will secure Greece's interim financing in the form of additional emergency loans from Bank of Greece, and thus save the country from bankruptcy.

Meanwhile, it's also reported that Spain is close to seeking a full-scale bailout even though the decision won't be made within a few weeks. In addition, markets reassessed ECB Draghi's comment that at least, the central bank is planning something to do to bring down peripheral bond yields. These reasons were actually all quite unconvincing. But most importantly, a risk rally on unconvincing reasons must be respected.

Technically, rally in stocks are set to continue in near-term. The Dow is heading to 13297 and above, while S&P 500 is heading to 1422.4 and above. FTSE 100 is targeting 5989 high and DAX is targeting 7194 high. We could see these levels violated within August. The Dollar Index's fall from 84.10 is set to continue to 81.18 support in the near-term, too.

Last week's development also affirmed that EUR/USD has at least formed a short-term base at 1.2042 while USD/CHF has defended parity. While EUR/AUD made another record low at 1.1602, EUR/CAD at 1.2196, downside momentum has been diminishing and a sizeable rebound could be around the corner. We'd continue last week's view to favor commodity currencies against dollar and yen in the near-term.

As we had anticipated, the ECB left the main refinancing rate unchanged. At the press conference, President Draghi reiterated his comments made last week in London that there's a need to contain risk premia in the bond yields of some countries.

While the governments have adopted various measures, including fiscal consolidation, structural reform, European institution building and activation of the EFSF/ ESM when circumstances dictate under the strict and effective conditionality embedded in the existing arrangements, to address the issue, they are not sufficient and he, therefore, announced that the central bank would make outright purchases of sovereign debts with the emphasis on independence.

BoE kept the Bank Rate unchanged at 0.5% and maintained the size of the Asset Purchase Program at GBP 375b. Only a brief statement was released and focus will turn to the quarterly inflation report to be released on August 8, and the meeting minutes to be released on August 15.

The FOMC meeting was a rather disappointing one as policymakers failed to deliver any new measures to boost the deteriorating economy. While we had anticipated that the Fed would be refrained from announcing QE3 in August, we thought it would at least extend the low rate guidance to 2015. Yet, the Fed decided to leave it unchanged.

Policymakers were maintaining easing bias but few changes were found in the languages of the accompanying statement. We expect the Fed was still gauging the impacts of the operation twist which was extended last month. We maintain our view that the QE3 will be announced at the next meeting.