Sentiment Shifts Back to "Risk-Off" on Europe, China as Week Ends

It's been an up and down week for sentiment in the financial markets. We started the week with very sharp risk aversion as a result of concerns around Spain and Italy and their rising yields, as there is continued concern that Spain will be unable to meet its debt obligations stemming from a negative feedback loop as austerity creates a deeper recession which further impairs the banking system which then might need rescue.

However the middle of the week saw sentiment recover as central bankers from around the world helped to calm sentiment by offering accommodative policy and in the case of the ECB a possible restart of its bond purchase program.

Spanish Yields Head Higher to End the Week

Coming into the end of the week nerves are being frayed once again as Spanish yields jump 15 basis points, back near the 6% level.

As a result the euro came under pressure falling back down to 1.31 level in New York morning trading.

Chinese GDP Softer than Expected

At the same time, overnight GDP data from China came in weaker than expected, and shows continued deceleration in growth there which can hurt global growth prospects.

That weekend the Australian and New Zealand dollars, but not enough to pair the strong gains in those currencies against the USD and JP wide seen mid-week.

Risk Aversion Back as Dominant Theme?

After stabilizing in the middle of the week sentiment has again deteriorated somewhat, at least for Europe, and that will be an important theme to monitor as we start next week's trading. The fundamental docket next week is packed with releases from the US (retail sales, manufacturing, housing), UK (retail sales, claimant count, BOE Minutes, CPI), Europe (German IFO and ZEW) as well as important reports from Canada (BOC Decision), Australia (RBA Minutes) and New Zealand (1Q CPI). The end of the week will bring the G7 and IMF meetings.

Therefore we look to move away from sentiment driven trading and towards fundamental driven trading as we digest the incoming data and the latest clues to monetary policy.

Do we return to the risk aversion theme we saw the beginning of the month or is the expectation of support from central banks, and perhaps a positive surprise from the fundamentals give the marketing enough confidence to extend the rally in equities and commodities seen in the middle in the middle of the week?

That's going to be key question we ask ourselves as we anticipate next week's action.