Euro Grinds Higher
The euro traded above 1.32 on Tuesday while other risk assets squeezed higher. While there are some inevitable month-end related rebalancing flows, investors have reacted favourably to last night’s EU summit. In French President Sarkozy’s words, the summit ‘went as planned’. Most of the decisions adopted on Monday, such as early execution of the ESM and updates on the situation in Greece ,were flagged well in advance. The Czech Republic joined the UK in opting out of the fiscal compact, with Sarkozy noting this was largely due to ‘constitutional reasons’. Newsflow in the European session was light, but an article in the Financial Times earlier gave risk a boost, claiming that the ECB’s next 3y LTRO (due on Feb 29) could see demand for up to EUR1 trn in cash, double the previous amount. If so, it would go a long way towards alleviating term funding concerns for Eurozone banks as their bonds fall due throughout the year. There has been a significant pullback in rhetoric since plans for potential transfer of fiscal sovereignty from Greece to Brussels were first floated over the weekend. However, governments remain aware that time is running out to finalise talks on the second Greek rescue before the mid-February deadlines, especially as the current debt-swap plans have not even been concluded. Portugal, the other elephant in the room, was not discussed outright at Monday’s summit but the moves in bond markets surely have not gone unnoticed, and markets may need to brace for fresh volatility if yields continue to spiral higher.
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UBS Investment Bank