Talking Points:

Euro May Face Selling Pressure as the ECB Reveals Bank Stress Test Criteria
Japanese Yen May Rise as S&P 500 Futures Hint at Oncoming Risk Aversion
Aussie Dollar Edges Higher as Asian Shares Correct After Yesterday’s Selloff

A relatively muted economic calendar in European and US trading hours may see investors focus on operational details of the ECB’s bank stress tests to be conducted as part of the central bank’s Asset Quality Review (AQR). We noted earlier in the week that the AQR’s completion is a likely pre-requisite for Mario Draghi and company to expand stimulus measures.

With that in mind, the perceived severity of the bank stress tests will be noteworthy in that if markets think lenders will have to substantially beef up balance sheets, this might force a deeper retrenchment on lending. That in turn has scope to amplify the perceived need for the ECB liquidity provision, building out easing bets and weighing on the Euro as prices stall at chart resistance.

On the sentiment front, S&P 500 futures are pointing cautiously lower ahead of the opening bell in Europe, warning of a risk-off mood emerging in the hours ahead. The Japanese Yen continues to show a formidable inverse correlation with the MSCI World Stock Index, hinting that deteriorating sentiment is likely to boost the go-to funding currency.

Most major currencies were little-changed in overnight trade. The Australian and New Zealand Dollars narrowly outperformed, tracking Asian stock exchanges higher as risk appetite recovered following yesterday’s selloff in the wake of the weekend’s dismal Chinese trade data.

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