Markets In Consolidations, Aussie Higher After RBA But No Follow-Through

Markets turned into consolidative mode after initial jump yesterday. S&P 500 attempted 1400 psychological level overnight but retreated to close at 1394 after hitting as high as 1399.63. Asian equities are generally higher but strength is so far limited. In the currency markets, Euro is consolidating below yesterday's low against dollar and yen for the moment. But Sterling has been relatively weak comparing to other European majors due to recently released weak economic data.

Indeed, EUR/GBP's persistent rally is starting to raise the odd of reversal in the cross. Meanwhile, Aussie edges higher after RBA left rates unchanged as widely expected. But no follow through buying is seen yet.

Inline with market expectations, the RBA left the cash rate unchanged at 3.5% in August although inflation has softened in recent months. The central bank decided to take a wait-and-see mode for two months in a row following two consecutive rate cuts in May and June, by a total of -75 bps.

Despite signs of economic recovery since the last reduction and the lack of indication of further rate cut by the central bank, we believe the bias of interest rates is skewed to the downside and we look for further easing later this year. More in RBA Maintains Cash Rate At 3.5%, May Still Ease In Coming Months.

In Europe, it's reported that IMF is pushing Eurozone leaders to lower Greece's burden. In IMF's view, Greece's bailout program is hugely off-track and the organization could only release further funds if Greece's debt could be reduced to sustainable level. And that would involve lowering interest rates on loan to Greece, ECB and others to have another 30% haircuts.

Meanwhile, ECB's bond-buying plan seemed to given green light as German Chancellor Merkel’s deputy spokesman Georg Streiter publicly stated that there’s "no doubt at all that everything the ECB is doing lies within its mandate." With Germany’s support, the market had gained confidence that the ECB would likely announce new easing measures as soon as in September.

In the US, the Fed Chairman Bernanke acknowledged that many US citizens are still struggling "with difficult economic and financial conditions" although "some key aggregate metrics - including consumer spending, disposable income, household net worth and debt service payments - have moved in the direction of recovery." In a pre-recorded video speech for a Massachusetts conference, Bernanke stated that macroeconomic indicators can "sometimes mask important information."

He also suggested economists to make use of also "distribution of income, confidence about future employment prospects and the ability of households to deal with financial shocks" to gauge "the economics of happiness" of the people. The Chairman’s concern may signal that the Fed would do more to ease the economic conditions further as most of the people are still "struggling."

On the data front, UK BRC sales like-for-like rose 0.1% yoy in July. Swiss unemployment rate was unchanged at 2.9% in July. Looking ahead, main focus is in Europe's data, including Swiss foreign currency reserves and CPI, UK industrial and manufacturing production; Italian GDP, German factory orders. From Canada, building permits and Ivey PMI will be released.