Countdown To Summit
We keep our bearish view on the euro and find it hard to see how the currency can mount a sustainable rally over the coming days as investor optimism over the upcoming EU summit on June 28-29 continues to fade. 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, but at least there have been some signs of improvement in Spanish sovereign bond markets where 10y yields fell again on Friday, and have dropped by more than 50 bp over the course of last week. Nevertheless our Euro rates strategists and our European economists remain extremely cautious at this juncture and the latter on Friday lower their Eurozone growth forecasts for 2013 to +0.4% (prev. +1.1%), citing the corrosive presence of banking sector strains and fiscal contraction. USDJPY slipped a little overnight but has managed to hold above 80.00. 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 mainly driven 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. Elsewhere, St. Louis Fed President Bullard provided the first policymaker reaction since the FOMC press conference. He said that QE3 is still viewed inside the Fed as having a pretty high hurdle – which very much resonates with our stronger dollar view. Today, scheduled economic data releases are thin on the ground, although Germany’s consumer confidence reading will likely attract some interest.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank