Investors took profits after the post-payrolls rally last week. Renewed worries about the stability of the European banking system shook confidence and triggered selloffs in stocks, currencies and commodities with gold as an exception. WTI crude oil price initially plunged to as low as 72.63 but news about refinery explosion in Mexico helped pare losses. The front-month contract ended the day at 74.09, down -0.68% from Friday's close. Gold glittered with the benchmark contract jumping to 1261.6, just 4.9 below the record high of 1266.5 made in June, before settling at 1259.3, up +0.66%. The yellow metal usually outperforms when economic outlook is uncertain and sovereign/ banking risk heightened.

Apart from a WSJ report which said that the stress test results published in July understated some financial institutions' sovereign debt holdings, a warning from the Association of German Banks that the 10 largest banks in the country may need to raise 105B euro to meet new regulations to prevent financial crisis heightened worries. Elsewhere in Ireland, the government extended its guarantee for short-term bank liabilities to December 31 from September 29. Stocks of Irish banks plunged after the announcement. Equities fell in both Europe and the US. While the Stoxx600 slipped -0.6%, DJIA and S&P 500 both dropped more than +1%.

While renewed concerns in banks penalized risk assets, bonds and gold surged as investors sought for safe havens. US Treasury and German bunds soared. Yield spread between Portugal and Germany debts climbed to a new record, highlighting lack of confidence in peripheral European markets. Gold rose close to the record high made in June. The metal's rally in the second quarter of the year was driven by European sovereign crisis which sharply increased lure for safe assets and drove gold to a new high. We believe gold will move higher if the situation in the banking system deteriorates further. For the time being, we do not view this catalyst as strong enough to push price higher as gold has remained at very elevated level.

Crude oil dropped in concert with stocks which are a barometer of economic outlook. Other than that relative strength in USD and failure of the tropical storm to cause destruction in oil facilities also lowered demand for the commodity. However, price rebounded after Petroleos Mexicanos' Cadereyta refinery was hit by an explosion. The refinery has capacity of supplying 235K bpd of oil products. Data from the US Energy Department indicates Mexico is the second largest supports of oil to the US.

We have a long series of economic data but the focus is on BOC's rate decision. We expect the central bank will raise the policy rate by +25 bps to 1% but deliver a more dovish statement, citing economic prospect in the US remains uncertain. Industrial production in the UK probably grew +0.4% m/m in July after contracting -0.5% previously, while that for Germany expanded +1% m/m in July, following a -0.6% decline in June. The Fed will release the Beige Book which should show flaggy US economic developments.