Risk Stumbles Further
Risk appetite was soft overnight as equity markets in the Eurozone sold off across the board. Ongoing concerns about growth in emerging markets may be playing a role, but in the wider context of asset market performance we still believe investors are now having trouble to justify further gains in the current macro environment, especially if policy accommodation is going to be harder to achieve in a more challenging price environment. For example, rhetoric from the likes of the ECB has been slightly more cautious on price pressures of late and prior assurances about lack of second-round effects appear to be somewhat hesitant. Policymakers can only go so far in blaming inflation on transitory factors – overnight CPI prints out of the UK point to just some of the challenges that policymakers must grapple with, and with balance sheets becoming ever more over-extended, scope for policy accommodation is at a premium. However, this does not mean the price action witnessed in the dollar of late should be totally reversed. On the contrary, if the US can continue to demonstrate upside growth surprises without upsetting the policy balance too much, its safety status should remain assured. If the rest of the world manages to pull itself out of a period of shortterm uncertainty, then that would be even better for the US, though the trade there would be more strength vs. G5/G10 rather than emerging markets, out of necessity to rebalance. This week will provide more opportunities for the Fed to demonstrate clarity on its outlook. Dovish members William Dudley yesterday also acknowledged some degree of conditionality and uncertainty about the further need for stimulus in the coming months, though in all likelihood more debate would occur heading into the end of current operations. Fed Chairman Bernanke will be speaking later today, while Treasury Secretary Geithner is also set to testify on the international financial system in Washington, and Eurozone observers may be interested in whether the US is any closer to providing funding for their firewall via the IMF at this point. EURUSD traded 1.3190-1.3245 and USDJPY 83.35-83.82.
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UBS Investment Bank