Nervous Calm In Europe
In the absence of any major destabilizing news, risk assets were better bid in the European session with EURUSD pushing up to 1.26 and AUDUSD back to 0.98. Equity markets were generally trading in the black and periphery spreads to Germany tightened. Focus remains on EURCHF after yesterday’s large spike and a smaller one overnight, fostering unsubstantiated market speculation about the possible imposition of fees on SNB sight deposits in a bid to defend the floor. The latest polls out of Greece (one showing SYRIZA in the lead; the other with SYRIZA and New Democracy virtually neck-in neck) did not offer much clarity. The absence of any broad agreement on key issues (Eurozone bonds, pan-European deposit guarantees, bank recapitalisation options) will leave the markets hanging until the Greek election on June 17 and the next EU Summit on June 28-29. While a New Democracy/PASOK coalition may trigger an initial euro relief rally, the fact that their leaders are also aiming to renegotiate existing agreements still sets up a potential showdown with the EU/IMF next month. As highlighted by the drop in the flash manufacturing PMI to 48.7 in May, China is far from immune to any sharp slowdown in Eurozone demand. Such concerns were underscored by wire reports suggesting that China’s major banks may miss their annual loan targets for the first time in 7 years amid weak demand. Of course, the Chinese government has shifted the macro policy focus more towards “stabilising growth”, but the market seems stuck in ‘seeing is believing’ mode and may not be convinced until we see harder evidence in the data. For May and June, we would expect the launch of new investment projects, and a recovery in monthly new lending to about RMB800 bn. That said, it remains questionable as to whether this would be enough to turn sentiment just yet. Yesterday’s US data – initial claims down to 370k from 372k; April durables orders ex-transportation down 0.6% m/m; flash manufacturing PMI down to 53.9 in May from 56.0 in April – had little impact.
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UBS Investment Bank