Euro Slump
“Unfortunately, the country is on the road to elections under very negative conditions”. So said PASOK head Venizelos after a two-hour meeting of five party leaders which yielded no breakthroughs in forming a new government in Greece. Though this was not a surprise, the clear lack of any middle ground among the various parties at the table triggered a sharp ‘risk off’ reaction – the euro slumped, the dollar was broadly firmer, peripheral yields rose and stocks fell. Party leaders will convene again tomorrow at 13:00 Athens time to form a caretaker government that will oversee the election, which will probably take place on June 17. Much still hinges on the SYRIZA, which boasts the strongest support in public opinion polls and is showing no signs of softening its opposition to the current bailout agreement. Indeed, SYRIZA head Tsipras warned that his party would put a “definitive end” to the bailout. Given the continued political uncertainty in Greece plus the associated fears of a halt or postponement of external support, a hard default and fears of a euro exit, our negative euro view remains intact. To be sure, this has been manifest in a slow grind lower rather than any capitulation on EURUSD to date, with euro bulls seeking solace from the better than expected German Q1 GDP print (0.5% q/q) and the fact that Greece met today’s EUR0.4 bn foreign-law bond redemption. Yet, we would expect the negative pressure on the euro to intensify as we get closer to the ‘funding wall’ in Greece, when the financing dries up – widely foreseen around mid-to-late June, coinciding with the impending election. Almost forgotten amid the Greek drama was a reasonably solid batch of US data, which reinforced our ‘no QE’ Fed view and offered some support for USDJPY. The 0.4% m/m rise in April US retail sales excluding autos, gasoline and building materials is consistent with real consumer spending beginning Q2 at an annual rate above 2% including services. Above-consensus results were also chalked up for the Empire State manufacturing index (to 17.1 in May from 6.6 in April) and the housing market index (to 29 in May from 24 in April).
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank