Stocks Rebounded As Fed Tapering Worry Eased, Dollar Mixed

The unexpected downward revision in Q1 GDP from the US was taken as an excuse to speculate that the Fed wouldn't taper the asset purchase that soon and helped US equities rebound. The Dow closed nearly 150 pts higher and is being followed broadly by Asian equities. Note though that Treasury yields remained close to recent highs with 10 year yields at 2.539% compared to Monday's intraday high of 2.657%. Gold also stayed weak and is hovering slightly above this week's low of 1221. The dollar is mixed in the currency markets, remaining firm against European majors but pulled back a lot against commodity currencies. USD/JPY is stuck in a tight range. The fate of the greenback will remain heavily data dependent, in particular on next week's job report.

Richmond Fed President Lacker said that the US economy is facing "a couple more years of sluggish growth". And even if the Fed might dial back the asset purchase, the "tapering is just slowing the rate" of the increase of the balance sheet. He emphasized that Fed is "not anywhere near decreasing the balance sheet yet". Lacker forecast GDP growth of 2.25% in 2014 but he noted GDP trends would alter the Fed's guidance. Instead, he said "labor market improvement is the order of the day right now". Minneapolis Fed President Kocherlakota said he expected unemployment to hit the 7% level in the second half of 2014 and urged the Fed to continue asset purchases until the rate is below 7%.

The euro and Swiss franc are the two weakest currencies this week. The euro was weighed down by ECB president Draghi's dovish comments on growth and the pledged to keep monetary policy accommodative. It's reported that EU finance ministers have agreed on the guidelines for assigning losses to private creditors on handling failing banks. German finance minister Schaeuble said that's an "important step" to make clear that "shareholders and creditors are liable first and foremost.” Talks with the EU parliament are expected next on the final version of the bill.

The Aussie showed little reaction to news that Kevin Rudd has been sworn in as prime minister after Gillard was ousted as the leader of the Labor Party. Some analysts noted that the change raised the chance of bringing forward the election, which would be positive for the economy.

On the data front, New Zealand trade surplus came in much narrower than expected at NZD 71M in May while NBNZ business confidence improved sharply to 50.1 in June. German employment data, Eurozone confidence indicators and UK GDP final will be main focus in European session. US will release personal income and spending, jobless claims and pending home sales.