Nothing New From Bernanke
Those hoping to cement their QE expectations were left disappointed by Fed Chair Bernanke’s testimony, which flagged the risks and kept all policy options open – yet failed to offer any real hints of impending action at the FOMC meeting on June 19-20. To be sure, Bernanke highlighted the potential headwinds ahead that have prevented the Fed from taking any options off the table yet, warning that “the situation in Europe poses significant risks to the US financial system and economy” and the fiscal cliff would “pose a significant threat to the recovery”. However, Bernanke stopped short of suggesting that the Fed was prepared to act preemptively to avert a crisis, a somewhat less dovish posture relative to that of Vice Chair Yellen, who earlier noted “there are a number of significant downside risks to the economic outlook, and hence it may well be appropriate to insure against adverse shocks that could push the economy into territory where a self-reinforcing downward spiral of economic weakness would be difficult to arrest”. This offered mild support for the US dollar, but the euro bulls were not to be denied, shrugging off the 3-notch downgrade of Spain’s rating to BBB (negative outlook). Implicit in the downgrade were higher than expected recapitalisation needs for Spanish banks, which Fitch estimated to range from EUR60 bn (6% of GDP) to EUR100 bn. Fitch projected that gross general government debt would peak at 95% of GDP in 2015 assuming a EUR60 bn recapitalisation programme and a lingering recession through the remainder of 2012 and 2013 – concluding that Spain’s reduced financing flexibility has “increased the likelihood of external financial support”. The downgrade was not totally unexpected in a market where risk sentiment has improved materially and investors still seem to be searching for positive headlines. GBPUSD took comfort from the BoE’s decision to stand pat and the flat services PMI for May, while the Australian dollar has retained a firm profile, feeding off the better than expected domestic employment data for May and China’s surprise 25bp interest rate cut – the first reduction since 2008, in advance of what is expected to be a soggy set of May Chinese data in coming days. While the impact of China’s rate cut on the real economy should be limited, the high ‘visibility’ of the move should underpin market sentiment.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank