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Markets Look to Merkel-Sarkozy Meeting to Gauge Sentiment; German GDP to be Released Today

Risk sentiment was down slightly but relatively stable in the Asian session as markets wait for the headlines that will be created from the Sarkozy-Merkel meeting that will be held today in Europe. An article in the Wall Street Journal suggested that France and Germany are considering the implementation of Eurobonds as a means for creating a fiscal union with more cohesion. There is some downside risk after the meeting as political obstacles could halt potential agreements. In China, newspapers have suggested that there is an increased possibility we will see more flexibility in the Yuan exchange rate and while this does not imply a strong appreciation in the near future, it does create an environment that will allow for a wider trading band. In the US session, the Atlanta Fed President (Lockhart, who next year will be a voting FOMC member) released a statement downplaying the possibility of a third round of quantitative easing, but did suggest that additional governmental asset purchases could still be seen. Today, macro data will come in the form of German GDP and this figure has more potential to move markets than usual. A weaker print will most likely weigh on risk appetite and send regional equities back into the red. In the US, industrial production data will be released and markets will be watchful for any comments made by the Swiss National Bank. Swiss macro data showed that producer and import prices dropped -0.7% on a monthly basis -0.6% on a yearly basis, which was essentially what the market expected given the recent value of the Swiss Franc. One newspaper in Switzerland reported that there will be a government meeting today to discuss possible measures to prevent further appreciation in the Franc but that these would be gear more toward giving aid to industries most affected, rather than outright currency intervention. Overnight, the Reserve Bank of Australian released the minutes from its August 2nd monetary policy meeting which did show some evidence that some of the members are biased toward additional rate hikes but that global uncertainty is preventing any drastic moves in interest rates. Markets are now expecting no changes to the base rate for the remainder of this year, which is a positive for regional equities and a negative for the Australian Dollar.

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