Relief Did Not Last; Risk Is Off Again

Improved sentiment was short lived. European data continues to weaken. SNB bulletin reiterated determination over EURCHF peg. UK mortgage approvals highest since May 2010. Volatility could increase later today during FOMC member Dudley speech.

Overall sentiment improved over night after G20 statement recognized the fragility of EU financial system and promised to take all necessary actions to stabilize the financial sector and ensure that banks have sufficient liquidity. Details are not available yet but it seems that G20 plans to increase the flexibility of the EFSF and leverage it up.

However, the relief did not last long as risk aversion started to dominate again over the past few hours sending the greenback higher and equity markets lower. Comments by ECB governing council member Klaas Knot that developments in Greece are not encouraging and Greek default cannot be ruled out contributed to reemerging concerns.

European data disappointed again when Italian Retail sales dropped 2.4% in July on annual basis after a -1.1% print in June. French Consumer confidence fell to 80 in September from 86 in August.

In Switzerland, the SNB bulletin reiterated that the SNB will enforce CHF cap with utmost determination and that the SNB still sees CHF high so it should continue to weaken. The SNB warned that the economic growth could come to a halt in second half of 2011.

GBP was the relative strength winner today after BBA mortgage approvals in August increased to 35.2K from 33.7K which is the highest print since May 2010. GBPUSD reached a high of 1.5472 but has since lost most of the gains.

Sobering news came out of China today. In an article published by MNI, Chinese government economist warned that property bubble in China is bigger than the US housing bubble was and that it is set to burst. Property bubbles bring systemic risk and it might be even worse then the United States added a researcher at the Chinese Academy of Social Sciences.

There are no data releases during the NY session.

Market volatility could increase at 1:30 pm ET when Federal Reserve Bank of New York president and FOMC member William Dudley delivers a speech in Washington about readiness for the next financial crisis. Q&A session is expected after the speech.