Risk Aversion Pressured Asian Equities, But Forex Markets Steady

Asian equities are deep in red today, in reaction to the -274pts fall in Dow on Friday after dismal employment data from the US. Crude oil also extends recent decline on weaker economic outlook. Nonetheless, the currency markets and gold are relatively steady. We'd like to point out again that the dollar pulled back after the NFP release on Friday and weakened against other major currencies, rather than rode on risk aversion. Revival of QE3 talk was seen as a major factor.

Other than European debt crisis, the development of this QE3 story will be a major focus this week, as Fed chairman Bernanke will testify before congress on Thursday. Cleveland Fed Pianalto said over the weekend that the poor NFP report didn't lead to a "substantial" change in her outlook, not a change in her position on policy. Minneapolis Fed Kocherlakota didn't comment on policy or economy but noted that "policy makers can achieve better outcomes by basing their outlooks on risk-neutral probabilities derived from the prices of financial derivatives."

European leaders have yet to finalize a plan to resolve the sovereign crisis in the eurozone,. Reuters stated that Germany's Chancellor would put forward a proposal for the creation of a "European finance ministry" and new powers for the European Commission and European Parliament. The aim is to strengthen the fiscal union. However, other countries, including Spain, favored joint issuance of European bonds. Spanish Prime Minister Mariano Rajoy stated that "the EU needs to reinforce its common institutional architecture so that investors regain confidence in the single currency." Regarding the banking problems, Rajoy said that Spain will "emerge from the storm through its own efforts and with the support of our European partners." ECB meeting will be a main focus this week. Markets are not expecting any ground breaking announcement like another LTRO or not even restart of asset purchases. But the bank could indeed start to pave the way for rate cut down the road in Q3 or Q4 should economic outlook worsens.

On the data front, Japan monetary base rose 2.4% yoy in May. Australia inflation expectation was flat MoM in May. Eurozone Sentix investor confidence, eurozone PPI and US factory orders will be released later today. But main focus will be on firstly whether Spanish treasury yield will jump again. Secondly, whether US yield will dive to new record low and push yen higher.