Seeking Consolidation
With the news flow from the Eurozone largely exhausted for now the market reverted to data in search of risk drivers. On Wednesday the results were somewhat more disappointing as US housing numbers suffered revisions to the weaker side, especially the deep revision to the December numbers, and there is some sign of strain in the mortgage market as the mortgage purchase index fell another 2.9%w/w. This is exactly the area of the US economy where the Fed has expressed significant concern, though even if further dips arise conventional QE may not be the right answer. Elsewhere the indicators were not that rosy either, as the February China flash PMI increased to 49.7 although export orders were fairly soft at 47.4, indicating contraction remains in place. In addition, despite the recent stimulus the overall policy direction still appears to be one of caution and there is a clear reluctance to reflate the Chinese economy via credit. So far neither the US nor emerging markets have been a source of downside risk but any change in this equation could have a far more damaging impact on sentiment compared to the Eurozone. Ahead on Thursday Germany IFO numbers will be a test of the Eurozone’s economic resilience, especially now that the LTRO has had close to two months to make its impact felt on the economy – if any at all. At this stage we still dispute the notion that the ECB’s liquidity steps can be a catalyst for renewed credit creation for the Eurozone household and corporate sectors, as banks are largely using the funds for their own refinancing needs and the marginal impact on the real economy is expected to be limited. In the same vein, the next 3-year LTRO may also be used for ‘ring-fencing’ purposes ahead of a potential credit event regarding Greece, and actually putting the funds to work remains several layers down the order of priority. In the US, initial claims are due and the market is looking for a slight rebound to 355k from last week’s 348k. Our economists note that the upcoming reading could be affected by seasonal adjustment problems relating to the Presidents’ Day holiday. During the US session EURUSD traded 1.3212-1.3267 and USDJPY 80.20-80.40.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank