Risk Markets Rebounded Strongly, Dollar Broadly Softer

Risk sentiments were boosted strongly by the solid Italian bond auctions yesterday, which showed that investors confidence were still present in spite of the inconclusive election. The DOW jumped 175 pts and closed back above 14000 level at 14075. S&P 500 also rose 19 pts, and closed back above 1500 at 1516. The dollar was broadly lower on risk appetite. First, the EUR/USD is back above 1.31 in the Asian session and is holding well above 1.3 key level. There was some stabilization, but there is no indication of reversal and risk remains on the downside as long as it stays below 1.33. Secondly, Euro's recovery in EUR/GBP is corrective looking - so far. The Aussie followed risk rally and the EUR/AUD has weakened today. So the euro is still vulnerable to another selloff.

ECB president Draghi said that the Eurozone economy is still weak, but he's optimistic that the accommodative monetary policy would help drive a "gradual recovery" in 2013. He also expects that the central bank would not removal policy stimulus any time soon as inflation would "significantly" undershoot its 2% target in 2014. He added that the "benefits of the painful actions" of austerity have "not yet materialized and the "economic adjustment is coming at a heavy social cost". He emphasized that austerity is for "their own benefits" and urged that reforms must continue. This was somewhat an indirect response to the inconclusive elections in Italy.

In Japan, prime minister Abe formally nominated Asian Development Bank president Kuroda as the next BoJ governor to succeed Shirakawa. Iwata, a professor, and Nakaso, a BoJ executive director, were nominated as deputy governors. The yen weakened mildly today on risk rebound and on expectations that Kuroda's team will pursue aggressive easing when they come on board. There will be eye-catching measures like buying risk assets or bonds on a large scale, but it should be noted that the yen should have exhausted selling in near term. We expect more consolidation ahead in March, possibly before Kuroda's first BoJ meeting in April.

In the US, the market is awaiting a meeting between top Congressional leaders and President Obama on measures to handle sequester, i.e. about $85 billion in spending cuts, that would begin on that day. Fed chairman Bernanke continued to defend the Fed's open-ended bond buying program in the second day of his testimony to congress. He downplayed the signs of internal divisions and emphasized that he has the support on quantitative easing from a "significant majority" of Fed officials.

On the data front, New Zealand building permits dropped -0.4% mom in January. Australian new home sales rose 4.2% mom in January. Japan PMI manufacturing improved to 48.5 in February, industrial production rose 1.0% mom in January and housing starts rose 5% yoy in January. UK Gfk consumer sentiment was unchanged at -26 in February. German employment data, CPI and Eurozone CPI will be the main focus in European session. A Q4 GDP revision will be released by the US, together with jobless claims in Chicago PMI. Canada will release IPPI and RMPI.