Caution Still Necessary
Risk was much in favour on Wednesday throughout Europe as broadly positive manufacturing prints globally further consolidated expectations that fears over a global economic slowdown are overdone. Chinese and Australian PMI were the bright spots, while most European releases surprised to the upside. However, we note that in Europe these ‘surprises’ are still coming off very weak levels, and in the Eurozone’s case aggregate output is still contracting. The austerity measures across Europe are only in their early stages of implementation, so with the pain yet to come we would not be carried away by these numbers. The market is still choosing to be ‘risk on’ because of positioning concerns, though we do acknowledge that a general soft landing globally will give governments more time for fiscal adjustments. At present, growth forecasts remain relatively conservative, but there is still some upside risk to our expectations of a recession in Europe in particular. On the other hand, pricing in early normalisation or at least policy stability is also too optimistic a view. Wednesday’s data out of the US would have reinforced this view as both the manufacturing ISM and the ADP report missed expectations, though compared to Europe they remain at elevated levels and the market is still looking for a firm labour market report on Friday. We believe the key risks still lie with the Eurozone, especially in Greece as surely the market will start to run out of patience over debt swap talks. Repeated assurances of immediate conclusion have been pushed back and some key deadlines are approaching. Schedules for new summits and meetings between Greece and stakeholders have been issued but they will almost certainly be pushed back given the lack of progress between the IIF and the Greek government. On Thursday, trade figures are out in Australia and Switzerland, while markets will hope the US’ unemployment situation can continue to improve on the
margins as jobless claims are due. EURUSD traded 1.3081 – 1.3218 and USDJPY traded 76.03-76.34 through the day.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank