Beginning in Asia, the majority of Asian equity markets are trading in the red as a large Japanese electronics company posted worse-than-expected earnings. Events in Thailand have taken a turn for the worse as political unrest leads to an increasing death toll and a state-of-emergency has been declared in 25% of Thailand’s provinces. For the most part, doubts about the region have already been price in - due to global fears of contagion — so economic fallout should be limited. In Europe, the EUR and GBP maintain their declines under heavy selling pressure, as many market participants continue to move away from risk-correlated trades and into USD and JPY. The market remains overly bearish considering the mega EU bailout has failed to produce any Tier 1 events which might have diminished our pessimism. As Europe opened this morning, the EUR and GBP dropped quickly to 1.2500 & 1.4535 respectively against the USD. The EUR is suffering from concerns that the ECB’s quantitative easing strategy, through its bond purchasing program, will eventually lead to the direct printing of money. Numerous ECB officials have mentioned that all purchases will be sterilized, yet as we’ve said before, the details of this process remain a mystery to us. The recent flip-flopping by the ECB on its stabilization policy has left its market credibility damaged. In the UK, sterling has failed to stabilize on account of the new coalition government. The assault on GBP began with a dovish May Inflation report, followed by a wider-than-expected Trade Deficit and topped by the David Blanchflower Bloomberg piece which pulled no punches in attacking BoE’s King for compromising the central bank’s independence. Investors still looking for European exposure should favor the GBP over the EUR, because we believe the recent collapse in sterling has more to do with overall risk aversion and less with actual UK concerns. However, the one X-factor for sterling will be the new European regulation on the Hedge fund industry. This legislation has the potential to hurt the UK the most, leaving Switzerland and the US the biggest gainers. Today’s market moving information will be the slew of US economic data releases including retail sales and industrial production. US economic data has been performing well as of late and we suspect that risk is skewed to the upside today. As the next trading week begins, the FX community will be watching the EURUSD 1.2500 level. There are rumors that this level is heavily protected and any break will lead to a serious drop. Yesterday, Spain’s PM Zapatero announced further austerity measures but the announcement failed to support the EUR in any way. The historical negative correlation between Gold prices and the US dollar futures index is now inverted. The US dollar continues to be bolstered by positive data and Gold is gaining momentum on worries about contagion and inflation concerns coming from the EU. We expect Gold to continue to trade higher in the near-term.

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