EU Summit To Begin
Risk appetite continued to improve modestly during the Asia session despite any concrete news to justify the moves. The Nikkei-225 is up 1.3% at the time of writing, despite a modestly stronger yen. No headlines emerged after the ‘working dinner’ between Germany’s Chancellor Merkel and French President Hollande, and the focus is now squarely on the twoday EU Summit which starts today in Brussels. We still expect the EU leaders to agree on a broad framework, loosely based on EC President Van Rompuy’s report. However, this alone is unlikely to soothe investor concern given the critical details of the plan are likely to be absent and are not expected to emerge until the next Summit in the autumn, or perhaps even later in December. Market expectations are low however, so the possibility of a positive surprise cannot be ruled out – especially if any measures are introduced to ease stresses in Spain’s sovereign bond market. On the data front, the moderation in Germany’s CPI print for June to 1.7% y/y fanned expectations of further monetary easing by the ECB at its next policy meeting on July 5. The latest Reuters poll indicated that 48 out of 71 economists believe the ECB will cut its benchmark rate next week. Rate cut hopes were further supported by ECB Executive Board member Praet’s comment that there is “no doctrine that interest rates cannot fall below 1%”, though he acknowledged that a cut would only have a limited impact on the economy. In the US, durable goods orders rose 1.1% m/m in May and the details of the report suggested greater resilience in activity than had prior reports. Chicago Fed President Charles Evans was on the wires, again putting forth his case for more QE, noting that the extension of ‘Operation Twist’ would only have “small effects”. We maintain, however, that the Fed is less likely to undertake further easing than other major central banks in the G10 space, underlining our generally bullish dollar view for this year.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank