Sentiment Hit By Papademos' Exit Comment, Yen Jumps After BoJ

Risk markets were hit hard by comments from former Greek prime minister Papademos that Greece exit risk is "real" and preparations are being considered. Asian equities are broadly in red with Japanese Nikkei down over -1.8% while Hong Kong HSI dropped over -1.6%. Dollar strengthened broadly with EUR/USD back pressing last week's low of 1.2641 while AUD/USD has already broken last week's low of 0.9794. Meanwhile, strong buying in the Japanese yen emerged on risk aversion and after BoJ announced to stand pat after today's meeting.

Former Greek PM Papademos said yesterday that European leaders have already sent "clear message", that is, "Greece should remain in the euro zone and the country should respect its commitments". And thus Papademos noted that "risk of Greece leaving the euro is real", depending on "whether Greek people will support the continued implementation of the economic program". Papademos also warned that if Greece default and exit euro, consequences for Eurozone, on its financial system and real economy, "will be profound and the associated cost will be significant and far-reaching continued implementation of the economic program". He estimated that Greece exit could cost EUR 500b to EUR 1T damage to the real economy at least.

The informal EU summit in Brussels will be a main focus today. Growth is supposed to be the major topic as European Council President Van Rompuy said this meeting will pave the way to decisions on growth measures in the formal summit in June. Though, Some debates are also expected as French President Hollande is expected to present a proposal on Eurobonds. The move is expected to receive support from Italy, Spain and European Commission. However, Germany has reiterated it's opposition stance repeatedly. And instead, Germany is believed to be preparing smaller scale "project bonds" that don't involve joint liability among Eurozone members.

Japanese yen jumped sharply today after BoJ left rates unchanged at 0-0.1% and refrained from adding to its quantitative easing program. BoJ noted in the statement that Japan is facing "critical challenge of overcoming deflation and returning to a sustainable growth path with price stability". Nonetheless, the bank is optimistic that "it has become increasingly evident that Japan's economy is shifting toward a pick-up phase as positive, although its economic activity has remained more or less flat." BoJ expects Japan's economy to "return to a moderate recovery path as the pace of recovery in overseas economies picks up led by emerging and commodity-exporting economies, and as reconstruction-related demand after the earthquake disaster gradually strengthens". Though, it also warned that "global financial markets have been jittery recently due to Europe's debt problems, so we must monitor developments carefully for now".

On the data front, Japan trade deficit narrowed to JPY -0.48T in April. Australia conference board leading indicator rose 0.2% in March while Westpac leading indicator rose 0.4%. BoE minutes will be a main focus in European session. Canadian leading indicator and retail sales, US house price index and new homes sales will be released in US session.