Euro Retreat
Euro bears have reasserted themselves, with the EURUSD retreat to levels below 1.2250 looking even more conspicuous in the face of the narrowing in peripheral spreads and gains in European equities. Expectations were already low heading into the second day of the EU finance ministers meeting. As such, confirmation of the initial EUR30 bn tranche for Spanish banks and one-year extension to Spain’s deficit-reduction plan offered no inspiration for the euro, particularly given lingering concerns about the credibility of any fiscal ‘targets’ – let alone how quickly a single supervisory body can be agreed and implemented. In terms of logistics, Spanish Economy Minister Luis de Guindos noted that Spain’s FROB rescue fund will distribute EFSF bonds to Spanish banks, which “can use them at the ECB if they need the liquidity”. One or more vehicles will be created to buy assets from lenders at “reasonable” prices, and these vehicles will issue bonds that will also be eligible at the ECB. The recapitalisation process is expected to take 18 months, with other details confirmed in an MoU to be formally signed on July 20 – a day after the German government convenes a special session of parliament to discuss the Spanish aid request. Further complicating matters is uncertainty over the German Constitutional Court hearings. A Der Spiegel article suggested that it could take up to 3 months to rule on the constitutionality of the ESM, instead of the expected 1-3 weeks. German Finance Minister Schaeuble flagged the risks, warning that any delay “could mean huge broader uncertainty in markets far beyond Germany and a huge loss of confidence in the Euro area and in its ability to make necessary decisions in sufficient time”. EURGBP and EURJPY were also heavy, with the pound gleaning support from the better than expected May industrial production print (1.0% m/m). Today’s second-tier US data had little impact, but the sharp drop in the NFIB small business optimism index to 91.4 in June from 94.4 in May will embolden those looking for the Fed to ease and magnify the focus on the upcoming FOMC minutes.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank