After relentless pressures on all fronts, stocks, bonds, Europe, and the Euro expressed a huge sigh of relief this week. Volatility prevailed as was expected and risk-on sentiment continued.
The market started the week with its familiar bearish sentiment but turned on a dime mid-week as ECB President Mario Draghi declared that the ECB was prepared to do "whatever it takes" to preserve the Euro. The following day, German Chancellor Angela Merkel, who is on vacation, after speaking on the phone with French President Francois Hollande issued a joint statement where they expressed that "France and Germany are fundamentally attached to the integrity of the euro zone" and "are determined to do everything to protect it."
The markets assimilated their statements well and ended the week with strong gains: European stocks rose for an eighth week; US stocks rallied with S&P posting 2% gains on Friday (the longest rally since March), Dow Jones achieved a three-week rally (the longest since January); Spain, Italy and US Treasuries fell; and oil reached back above the $90 level.
On the currency front, Euro made a strong comeback after reaching multi-year lows against several currencies. Aptly called by some as 'Super Mario Draghi' (from the console and computer game Super Mario Brothers), his comments and the Merkel-Hollande joint statement unleashed a flurry of stop loss runs. Euro bears took cover as the bulls came in droves.
EURUSD like several currency pairs gapped down to start the week, opened at 1.2119 and wobbled down to reach its lowest since June 2010, before posting an impressive comeback (nearly 400-pip gain from the weekly low in three days).
The other majors piggybacked on the revitalized risk-on sentiment. GBPUSD, AUDUSD, USDJPY were all up on Friday, with USDJPY ending the week effectively unchanged. AUDUSD started the week retracing and even breaching last week's low, but when the uptrend became resurrected mid-week, the pair turned a full 360 degrees and ended the week at a new high (highest since April 2012). Meanwhile, EURAUD on late Friday posted a 99-pip upmove in the Europe session which was quickly erased by a 122 pip drop in the last 4 hours of the week's trading. This gave EURAUD a weekly close just 49 pips higher than Monday's open despite making 100-pip up and down swings the entire week.
Going forward, events next week and beyond are bound to keep the volatility high. Draghi and Bundesbank President Jens Weidmann will talk about rescue measures to further deal with the region's crisis. A separate closed door meeting between US Treasury Secretary Tim Geithner and two European leaders, German Finance Minister Wolfgang Schaeuble and Draghi, will take place on July 30. On August 1, the Federal Reserve is expected to talk about possible additional measures to prop up the US economy, while the US Labor Department will issue the monthly jobs report on August 3. Finally, BOE and ECB will also meet next week, while BOJ meets on August 9.