ECB Under Scrutiny
The ECB decision takes centre stage today as the ECB’s response to the recent escalation in the Eurozone debt crisis comes under scrutiny. Up until know, the central bank’s position on the Spanish financial sector and how banks can (and cannot) be recapitalised has been clear, and some key decisions are being left to the political establishment, but there is a necessity for them to show their cards when conditions turn urgent. The market will be looking for indications on how they would respond to potentially systemic events, and whether new unconventional measures such as a reactivation in the SMP or new LTROs are on offer. In addition, Bloomberg surveys on the decision point to some expectations of an outright rate cut by the central bank, especially with growth expectations waning on a global basis. Otherwise, the focus would remain on Spain and whether the country would be edging closer to some form of programme. German officials have repeatedly stressed that it would be up to Spain alone to decide on whether they would enter such a scheme, but the Spanish government has repeatedly dismissed the need for such a step. Nonetheless, the position of Madrid is also one of asking for access to the Eurozone’s facilities for its banks, and it is hard to see how these two positions could be reconciled. Spain’s Treasury Minister said on Tuesday that the country is losing access to credit, and called for institutional help for its financial sector. The highly-watched G7 conference call failed to yield any material resolutions on Tuesday, and the biggest impact seemed to be on the yen, with Japanese Finance Minister Jun Azumi saying he pressed his case for the G7 to act on the Eurozone crisis, as the resulting risk-aversion is causing yen strength and damaging the domestic economy. The position from the non-Eurozone G7 countries appear to be hardening, with an emphasis on Germany to do more to contain the crisis, but external help is still not forthcoming as the common perception that Eurozone does have the resources to save itself remains firmly entrenched, but global nervousness is rising. Overnight Asian equity markets managed to recover somewhat, while EURUSD traded 1.2442-1.2512 and USDJPY 78.62-78.95.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank