Draghi Inspired Risk Rally Continues

The ECB Draghi triggered risk rally overnight was impressive. DOW jumped 211 pts to close at 12887.93 and is back near to top of recent range. Asian equities followed with Nikkei up 123 pts and HK HSI up 350 pts at the time of writing. Spanish 10 year yield settled comfortably below 7% level at 6.872% while Italian yield settled below 6% at 5.991%. Dollar index's break of 82.73 support confirmed short term topping and we'd likely see the greenback remains soft in near term. But we'd likely to point out that EUR/USD is feeling some resistance from 1.2324 and will need some more fuel to break through this resistance level. Similar situation is seen in GBP/USD as it retreated mildly from 1.5737/5777 resistance zone. USD/CHF also recovered after hitting 0.9746 support. Markets might take a breath today before the week closes.

To recap, ECB Draghi's comment was simple yet effective. Draghi simply put it straight that "ECB is ready to do whatever it takes to preserve the Euro" and he urged the markets to believe him "it will be enough". ECB could restart the bond buying program to support Spanish and Italian bonds. Or give a nod to giving ESM a banking license to increase its firepower. However, we'd emphasize again that nothing if really confirmed. ECB will still face political pressure from Germany. And it's uncertain what the majority inside ECB thinks. The development makes next week's ECB meeting and press conference a very important one as markets would anticipate some follow up from Draghi.

Meanwhile, the situation in Greece will also cloud the outlook in Euro. The coalition leaders are yet to agree on an EUR 11.5b austerity package. Prime Minister Samaras will need to meet with Pasok's Venizelos and Democratic Left's Kouvelis again on July 30. Kouvelis said that the discussions are "not done" as “the economic situation is extremely difficult but society on the other hand can’t stand being bled any more.” EC President Barroso urged Greece to "deliver" and warned that "words are not enough". Barroso also emphasized that "staying in the euro is the best chance to avoid worse hardship and difficulties for the Greek people, mainly for those in vulnerable positions". Meanwhile, it's also uncertain for now whether Greece will need another debt restructuring.

In Japan, national CPI core unexpectedly dropped -0.2% yoy in June while Tokyo CPI core dropped -0.6% yoy in July. The data indicates that mild deflation persisted in the country and would mount additional pressure on BoJ to ease monetary policies further. BoJ has a 1% inflation target and expects to meet this target in fiscal year 2014. But two new board members criticized that this projection is overly optimistic.

Looking ahead, US Q2 GDP advanced reading will be the major focus today and is expected to show 1.4% annualize growth, comparing to 1.9% in Q1. Swiss KOF, German CPI and U of Michigan sentiment will also be released.