Risk Continues Advance
With the glaring exception of the AUD, risk appetite generally held firm overnight with equity markets in particular maintaining their good run of form of late. Buoyed by Fed comments overnight and a rally in US shares, European bourses made gains across the board while a strong BTP auction strengthened the mood that the worst of the sovereign debt crisis is over. Nonetheless, investors remain clear that the recovery seems US-centric at this stage and selectivity in being ‘risk on’ remains firm. Comments from the NPC-closing press conference held in Beijing overnight suggests that stimulus from China will still be hard to come by, especially with regard to the housing market. As a result, the AUD faltered, falling to sub-1.05, though as much of the move can be attributed to dollar strength as AUD weakness. Within the Eurozone, comments on the debt situation were limited and markets now have greater room to focus on macro data and their conventional effect on monetary policy. Eurozone CPI remains rather elevated at 2.7%, which does confirms the current view of the ECB. Nevertheless, given central banks will continue to view recent price gains as ‘tentative’, they will retain the ability to provide stimulus if economic conditions make a turn for the worse after Q1. The Eurozone in particular attuned to the risks of second-guessing inflationary trends, which arguably have come back to haunt the central bank twice over the last four years. German policymakers were clear to stress yesterday that they did not foresee the second-round effects within the labour market which would normally necessitate an interest rate hike, but data suggests these risks are muted given the risks involved and there is far less chance, at least from the markets’ perspective, that the Draghi ECB would oblige. The Eurogroup also formally approved the second Greek bailout overnight but there is still no word on how much the IMF would be willing to contribute. Ahead today, Norges Bank will meet at 13:00 – the market is not expecting any change but we would expect some harsh words for the real estate market and credit conditions, consistent with recent commentary. Fed Chairman Bernanke will also be on the wires later at 10:00 ET.
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UBS Investment Bank