Stabilisation in Europe
After a further escalation in risk aversion in Asia, markets stabilized in Europe though there were limited fundamental drivers behind the moves. A flurry of headlines hit the newswires from a German Finance Ministry spokeswoman who said that Germany has a responsibility to be prepared for any eventuality in the Eurozone, that it stands by Greece but Athens “must do its homework”. She gave no comment on talk that the ECB is preparing a Greek exit plan and the market largely looked past the commentary. With parts of Europe on holiday, data flow was thin and focus remains in Europe. Uncompromising remarks from SYRIZA party leader Tsipras didn’t help sentiment yesterday when he said that if Europe cuts off Greece’s funding “then we will be forced to stop paying our creditors”. Yesterday’s sudden one-big figure fall in USDJPY didn’t help either, sending the Nikkei-255 over -2.4% lower at the time of writing. Yen bulls have indeed reasserted themselves, with USDJPY losing its footing in the face of the surprise deterioration in the Philadelphia Fed manufacturing index to -5.8 in May from 8.5 in April. This contrasted sharply with the 11-point jump in the NY Fed measure reported earlier this week, magnifying the focus on the Chicago PMI due May 31. Adding to the dollar negativity was the unexpected 0.1% m/m drop in the April index of leading economic indicators, the first decline in seven months. Jobless claims were unchanged at 370k – down 20k from a month ago to reverse most of the April spike – yet are not falling at a sufficiently fast pace to reduce the perceived risk of further Fed easing amid the considerable headwinds in the growth equation. Some solace could be gleaned from the latest poll results, the first to put the New Democracy (23%) ahead of the SYRIZA (21%) and PASOK (13%). The poll predicts the New Democracy could secure 123 seats, which combined with the PASOK’s 41, would produce a comfortable majority. This would be EUR-supportive to the extent it suggests greater scope for compromise on the bailout agreement, at least relative to a SYRIZA-led coalition. Nonetheless, it would be dangerous to put too much faith in one poll in this uncertain environment, where the yen remains a ‘safe haven’. Indeed, the yen crosses still look vulnerable – EURJPY, AUDJPY and GBPJPY, which has been undermined by Prime Minister Cameron’s assertion that the BoE has flexibility to do more to support the economy if needed. The focus is now on the G8.
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UBS Investment Bank