Summit Optimism Fades
Investor optimism appears to be fading quickly ahead of the upcoming EU summit on June 28-29. The euro came under steady selling pressure throughout the European session, with Spanish and Italian bonds widening across the curve and equity markets trading in the red. Spain has formally requested European aid for its banks, though it has not asked for any specific number, according to the Economy Ministry spokeswoman. Elsewhere, Swiss sight deposits in the week to June 22 rose to CHF300.89 bn vs CHF284.562 last. The most likely explanation for the increase is renewed intervention, though part of the explanation for the rise was likely a re-adjustment of the liability mix on the balance sheet. Scepticism is entirely warranted, in our view, especially given that a meeting of leaders from the Eurozone’s four largest economies in Rome on Friday produced little of substance, except a vague aspiration to create a growth fund worth EUR 130 bn. Details on how this would be funded or how soon it would come into operation were not forthcoming, however. Weekend news that the troika have postponed their visit to Greece by a week is not likely to steady nerves either. Our Euro rates strategists and our European economists remain extremely cautious at this juncture and the latter on Friday lowered their Eurozone growth forecasts for 2013 to +0.4% (prev. +1.1%), citing the corrosive presence of banking sector strains and fiscal contraction. After a recent soft patch, JPY strengthened again overnight with USDJPY falling back below 80.0. We resist the urge to get overly bullish here – US 2y yields have stagnated again, and although Friday’s spurt of buying interest appears to have originated in Tokyo, we believe it was driven mainly by technical factors and thus the pair is vulnerable to a reversal. We keep a wary eye on Tuesday’s parliamentary vote on a sales tax increase – a sizeable rebellion within the ruling DPJ party could push USDJPY significantly higher.
Click here to read the full report: UBS Morning Adviser America
UBS Investment Bank