Market Drivers July 30th, 2012
Enthusiasm fades as market goes into “show me” mode ahead of ECB meeting, euro drops below 1.2300
UK lending data sinks due to Jubilee
Nikkei up 0.80% Europe up .51%
Oil at $90.00/bbl
Gold at $1621/oz.

Europe and Asia:
JPY Industrial Production -0.1% vs. 1.6%
EUR Spanish GDP -0.4% vs -0.4%
GBP Net Consumer Credit 0.3 vs. 0.8
GBP Mortgage Approvals 44K vs. 49K

North America:
None

Markets opened the week decidedly more cautious towards risk with EURUSD drifting lower throughout the Asian and early European dealing as it sold off towards the 1.2250 level. Traders were in a “show me” mode with enthusiasm fading over last week’s comments by both Mario Draghi and Angela Merkel in support of the euro.

With ECB meeting scheduled for this Thursday, currency markets are waiting to see if Mr. Draghi will back up his rhetoric with action and take some concrete steps to shore up the EZ periphery bonds which remain at highly elevated yields. One possibility that could help out the market would be to revive the SMP program allowing the ECB to step into the secondary markets in order to support Spanish and Italian debt. However, such activity would still leave the problem of primary financing and with Spanish bond yields near the 7% level the sovereign will continue to have difficulty in financing its operations going forward.

Another policy move that could help stabilize the markets would be for ECB to quickly assume its central regulator role in pan European banking and offer deposit insurance across the continent. Under present conditions deposits are guaranteed by the member central banks, creating massive anxiety amongst investors and leading to huge capital outflows from South to North. It remains to be seen if Mr. Draghi will make any such moves this Thursday, but having raised expectations, EU leaders will now face massive market disappointment if they do not deliver in a dramatic way.

For the time being they are given the benefit of doubt with today’s Italian auction showing solid improvement over the period prior. Italy was able to auction off its full allotment of 10 year bonds at a yield of 5.96% versus 6.19% in June. Meanwhile on the economic front the data from the EZ continued to show weakness with EZ business confidence declining for the 5th month in a row as it slid to 87.9 in June from 89.9the month prior.

With no eco data on the calendar in North America today, the US session could be quiet with risk FX maintaining its narrow ranges as markets square up ahead of the events at the end of the week. Aussie remains the one standout amongst the majors as it continued to barrel higher approaching the 1.0500 level in mid-morning European dealing. The unit continues to benefit from both risk and diversification flows with EURAUD making a fresh low of 1.1700 earlier in the session. If equities rally into North American trade, AUDUSD will very likely take out the 1.0500 level as the day progresses.