Tomorrow's EFSF Vote to Provide Short Term Direction; Euro Rallies Toward 1.37

Markets stabilized during the Asian session, largely on speculation that some EU nations are looking to add requirements to the Greek bailout agreement. Specifically, these would require private bondholders in Greece to assume a larger percentage in losses than was suggested previously. Another negative came from official comments forecasting an increase in borrowing costs for the Greek government throughout 2015. The anonymous comments, however, did little to shake markets and risk assets did see some modest improvements on the day.

Tomorrow's key event for the region will come with the EFSF vote in Germany as the government considers whether or not to agree to send the next round of bailout funds to Greece. Markets are generally optimistic in terms of how this vote will play out, as many German officials have said nothing recently to suggest a majority vote will not be seen. Provided this is true, the Euro could see something of a relief rally, as it now trades back above key psychological levels at 1.3510-1.3590 while the USD/JPY is also slightly higher at 76.40-76.90.

Positive stock markets are helping the high yielders move higher (and weighing on the US Dollar) but the erratic moves are looking as though we are seeing stop losses tripped more than an actual shift to Dollar selling. Futures markets are suggesting a higher open so as long as this remains the case, the current rallies will be supported. Historically, October is a turbulent month for stock markets and, given recent events, that volatility could be even more pronounced this time around.

Other areas attracting market focus are coming from the ICI Mutual Fund Statistics data, which is now showing that many long-only mutual funds (funds that strategically choose not short the market) are seeing sharp declines in their cash balances (to levels not seen since the 1980s). This could turn out to be significant if risk sentiment does not start to improve, as the heavy correlation between the equities and currencies markets could spell enhanced volatility, most likely to the downside.