Risk Aversion Sentiment Dominates Global Markets

Risk Aversion Sentiment Intensified Early Week As A Slew Of Data And Comments Hit The Wire:

(CN) CHINA JUN CONSUMER PRICE INDEX (CPI) M/M: -0.2% V -0.3% PRIOR; Y/Y: 2.2% V 2.3%E (lowest since Jan 2010)

(CN) CHINA JUN PRODUCER PRICE INDEX (PPI) M/M: -0.7% V -0.4% PRIOR; Y/Y: -2.1% V -2.0%E (biggest decline since Nov 2009)

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(JP) Japan’s May Trade Balance came in worse than expected at a deficit of ¥848B (versus -¥837B expectation), Machine Orders for the month saw their biggest decline since April 2005 (-14.8% versus -2.4% expectation)

(EU) Credit rating agency Moody’s noted the ECB’s restriction of using government backed bank bonds is a credit negative for some banks in the region. With regards to Italy, spending cuts are credit negative for the regional and local governments. The ECB rate cut was a negative for euro money funds.

(EU) ECB’s Draghi: Reiterates some downside risks to the growth outlook have materialized in his address to EU parliament.

ECB tools support transmission of policy to the real economy
ECB retains full capacity to act in a firm, timely manner.
Indicators point to weakening growth and greater uncertainty in Q2, continue to expect gradual recovery.
Reiterates risks to inflation outlook remain broadly balanced, inflation to be below 2% in 2013.
Downside inflation risks include weaker than expected growth.
Global central banks have cooperated very closely.
Comparisons to what different central banks have done over last several years has limits.
To a certain degree the size of ECB balance sheet is not related to monetary policy.
ECB’s experience in the troika structure, cooperation with EU and IMF, has been very good.
Governments and citizens must show ownership of reform programs.
There is a consensus to adjust Spain’s deficit target, Spain remains fully committed to reforms.
Need to move toward more shared sovereignty.

Upcoming News Releases That May Fuel Risk Aversion Sentiment:

US FOMC Meeting Minutes – Reminds the market why FOMC decided to forego QE3 and only extended Operation Twist
BOJ Interest Rate Decision – This could be a case of too little too late as BOJ has now lost all credibility to fight deflation. Market will not be easily impressed unless BOJ increases their Asset Purchasing Scheme significantly.
Chinese GDP – Market is expecting below 7.9% of release and if the actual figure is much worse than expectation, we should see strong risk aversion momentum.

How to interpret these headlines?

It seems that risk aversion is the name of the game today as news out of China kick off the week showing that Chinese Economy went to deflationary territory in June, combined with a very disappointing Trade Balance in Japan, it is no surprise that the market showed little consolidation from last week’s sharp sell-offs.

Considering that there are still uncertainties in Europe, as the optimism over the EU Summit wanes, and the fact that credit rating agencies are ready to cut Spain’s sovereign credit ratings, I believe the risk aversion momentum is likely to dominate the market… therefore, we should be looking to BUY USD and JPY, at least during early week. I am looking at either SELL EURUSD or EURJPY as both trades have strong potentials for huge profits.