Sentiment Steady
European trading was relatively calm overnight. Data and news were light, but the limited releases were still positive for sentiment. The RBA kept the cash rate steady at 3.5% overnight in line with consensus, noting that “material easing” had already been delivered by earlier cuts. European and Asian indices are not exactly euphoric but cautiously optimistic on proceedings up ahead. Meanwhile, Ireland announced that it has returned to the primary market for the first time since September 2010, which is a symbolic step in efforts to contain the Eurozone crisis. Nevertheless, the focus within markets has clearly shifted towards growth and the potential policy response from both governments and central banks. Clearly this week the emphasis is on the latter with the ECB and BoE making key decisions. UK credit figures overnight were mixed, but weak M4 growth increases the risk of the BoE acting more aggressively – we are looking for a GBP75bn rise in the asset purchase programme. The ECB could also be under pressure to react to worsening output and employment numbers, but our economists note that the central bank would not want to be seen as rewarding government actions, since last week’s decision really delivered little of substance, regardless of how this has been interpreted by markets. On the other hand, weaker growth expectations could directly translate into challenges to the ECB’s price stability mandate, and if there is a case to be made for more aggressive action by the Governing Council, then additional measures to support sovereign bond markets could be embedded into their more functional policy decisions. This may need to wait though, until later meetings when the ECB has more data confirmation. Most central banks, including the Fed, are currently at such a phase, so the correction in recent price action could arise from disappointment in short-term expectations of policy stimulus. Ahead today, factory orders and auto sales figures are out in the US. EURUSD traded overnight in a range of 1.2577-1.2614 and USDJPY 79.42-79.84.
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UBS Investment Bank