Risk Woes Remain
Risk appetite has started the week on a negative note as politics across the Eurozone begin to cloud the adjustment process. Firstly, the IMF did manage to announce a ‘firepower’ boost of over $430bn but the contingency nature of many of the countries’ contributions means that actual deployment when called upon remains under scrutiny, all in an environment where the ability of individual countries to meet current budgetary plans is being increasingly questioned. The Dutch government fell overnight and its Prime Minister has already handed in the cabinet’s resignation, all on the back of presidential elections in France which may have produced a result perceived which could yet generate uncertainty over the coming months. Otherwise, market focus will remain with the key policy decisions out of the US and Japan this week. The market is still pricing in some degree of divergence on the US side, with our economists not expecting any material change in policy language but the possibility of a forward revision to its normalization schedule from Q4 2012. Coupled with additional easing by the BoJ, USDJPY is a key pair to watch and figures suggest that the market is not fully priced for a material move, especially in light of the weak beginning to trading on Monday, which has pushed US yields towards fresh lows. Growth also remains a worry in the wake of disappointing flash PMIs across the Eurozone. The need for growth momentum in the Eurozone has already prompted a call for a rethink in the dominant economic policies being pursued across the Eurozone, especially with Berlin still pushing for primacy in austerity. This has directly led to some degree of political disagreement in other nations, and non-incumbents have been calling for, indirectly, less vigorous pursuit of fiscal targets, but at this stage sovereign bond markets may also be less forgiving of any fiscal slippage. The ECB’s role will also be increasingly called into question if policies challenge the Eurozone further.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank