Euro Reality Check
Markets began the US session in a buoyant mood after three of the world’s key central banks all delivered additional stimulus. The Bank of England and ECB served up £50bn in QE and a 25bp cut in the main refinancing rate cut to 0.75%, respectively – decisions which were largely expected. However, the PBoC cut its one-year lending rate by 31bp to 6.00%, and the ECB lowered its deposit rate to zero. These decisions were not entirely expected and the additional stimulus will surely be welcomed by the market as a sign that central banks globally are taking action to avoid a new downturn in global growth. Nonetheless, the euro was hit hard by the ‘failure’ of the ECB to deliver additional liquidity stimulus on the back of the rate cut, as Draghi was clearly not willing to play too many cards with this hand, merely indicating that the Council did not discuss any non-standard measures today. After the initial bounce higher, the tone in the equity markets soured. If anything, the stimulus delivered could be portrayed as a sign of escalating economic pressures globally, in particular in China, where over a month’s worth of fiscal and policy measures appeared to have delivered very little return. New positioning for a global slowdown could be a powerful new force in markets – though investors are wary of preemptive central bank responses and may choose to remain cautious in the application of such trades. As such, Friday’s non-farm payrolls release in the US will have a stronger bearing on sentiment. Today’s better than expected US jobsrelated data (June ADP employment up 176k; initial jobless claims down 14k; June ISM non-manufacturing employment index up to 52.3) offered some consolation for the US growth bulls, but the Fed will want to keep its options open and FX markets are unlikely to respond with clear conviction until the Fed’s position is clear. UBS expects an 85k rise in nonfarm payrolls for June (vs the 95k consensus estimate), with the unemployment rate holding at 8.2%.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank