Risk Appetite Improves as Central Banks Coordinate to Inject Liquidity to Eurozone's Banking System

The biggest event happened yesterday was the joint action by central banks to provide liquidity to Eurozone's banking system through the end of the year. The ECB announced that it would, in coordination with the ECB, the BOE, the BOJ and the SNB, to conduct 3-month USD liquidity operations for 3 times through the year. In addition to the 7-day USD facility announced on May 10, 2010, the new operation aims to ensure sufficient liquidity in banks. The offerings will be carried out at in the form of repo, at fixed rate and with full allotment. Tender dates will be October 12, November 9 and December 7. The move lifted market sentiment, sending equities and risky assets higher. In the commodity sector, the front-month contract for WTI crude oil rose briefly above 90 before settling at 89.4, up +0.55% while the equivalent Brent crude contract jumped +2.62%. The October Brent crude contract expired on September 15. Gold price slumped as risk appetite increased. The benchmark Comex contract plummeted -2.74% at close. Price will continue to search the bottom in the-near-term.

The banking system in the Eurozone showed signs of stress in mid-August. On August 18, the ECB lent $500M to a bank via the 1-week USD funding operation. The situation deteriorated further when 2 banks borrowed a total of $575M earlier this week. Use of the 1-week facility has been unless there's no other way for a bank to borrow money, the operation charges a higher-than-market rate and has margin. Use of this 'last resort' signals a dry-up of liquidity in the banking system. Yesterday's announcement showed that world central bankers have stepped up measures to inject liquidity to the market and should be viewed positively by investors. IMF's Lagarde welcomed the action, saying it is 'exactly what is needed'. Yet, we advised investors not to be too optimistic. While the move might provide a boost in the near-term, the underlying problem in Eurozone has remained unresolved.

Gold has fallen for a third consecutive day. Currently trading at 1770, the benchmark Comex contract has dropped to the lowest level in almost 3 weeks. Notwithstanding further selloff, we believe the metal will gain buying interest at around 1700 and will eventually reach new records as long as the low interest rate environment persists. Fed is prone to expand quantitative measures later his year. The next event is the FOMC meeting on September 20-21. Some market participants said the coordination action yesterday was a prelude to the Fed's QE3. We expect the Fed, at next week's meeting, will not deliver anything more than so-called 'operation twist' -increasing the average maturity of securities holdings by swapping holdings of lower maturities Treasuries with longer ones. Such move is expected to have less impact on stimulating growth and gold's rise than outright bond purchases.

As far as the dataflow is concerned, headline CPI in the US climbed +0.4% m/m in August from +0.5% in the prior month. On yearly basis, the reading rose to +3.8%, accelerating from +3.6% in July. Core inflation stayed at +0.2% on monthly basis in August but soared to +2% from a year ago after growing +1.8% in July. Heightening inflationary pressures in the US should support hawks' view in dissenting further easing. Other economic data actually revealed the economic weakness. The Empire State Manufacturing index surprisingly slipped to -8.82 in September from -7.72 in the prior month. The market had anticipated a rise to -3.9. Initial jobless claims unexpected rose +14K to 428K in the week ended September 10, compared with market expectations of a dip to 410K.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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