Fed Officials Calmed Markets, China Weighs

After dropping as low as 14551 overnight, the DOW staged a recovered and pared back much of the losses to close at 14659, down -139.84. Comments from Fed officials Fisher and Kocherlakota helped eased some worries on the impact of Fed's tapering of stimulus, and lifted sentiments mildly. Asianmarkets followed and opened higher, but recovery momentum is weak so far. There is some selling at the time of writing on China liquidity concerns. The Dollar index rose as high as 82.84 yesterday, but turned sideway since then. In the currency markets, dollar seems to be losing some momentum against other major currencies, in particular against yen. But there is no clear sign of topping yet.

In the U.S., Fed Fisher emphasized that the Fed is talking about "dialing back" the stimulus and the word "exit" is "not appropriate". Fisher also said he's "not uncomfortable" with current rates, but he's worried about a "significant spike" in yields that would risk financial instability. However, a "gradual rise over time" would not worry him. Minneapolis Fed Kocherlakota said that the part of FOMC statement about "highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens." is very important. And he said Fed should "bring that forward and hammer it every time we talk about policy". And he said Fed should continue the asset purchase until unemployment falls below 7% and as inflation remains below 2.5%.

Investors still have other concerns: the volatility and liquidity in China markets. China stocks extend a decline after suffering the worst day in almost four years yesterday. The PBoC's attitude over the past weeks suggests its intention to give "a lesson" to over-lending banks, before calming down the credit crunch worries. It could also tighten the liquidity again if banks continue to misbehave. While the central bank affirmed that liquidity has remained ample, it is actually tighter than previously and rising of interbank rates in the near-term cannot be ruled out.

On the data front, Japan's CSPI rose 0.3% yoy in May. U.K. BBA mortgage approvals will be released in European session. The main focus in on U.S. data. U.S. durable goods are expected to grow 3.0% in May, with ex-transport orders down -0.2%. Consumer confidence is expected to drop slightly to 75.5 in June. There will also be housing data featured including S&P Case-shiller house price index and new home sales.