RBA Rules Nothing Out
The euro held in a tight range overnight with no new headlines to push market opinion one way or the other. The accumulation of news over the past few days has been largely negative however – a fact that has not gone unnoticed in Australia. Responding to an audience question, RBA Deputy Governor Lowe said he could not rule out the cash rate going to zero in the event of a “complete meltdown” in Europe. He was of course speaking in hypothetical terms, and he ascribed a “very low” probability to this outcome. AUDUSD rightly did not react, but his comments do support market opinion that central banks with the greatest room for manoeuver can be expected to cut rates most in the event of a possible major deterioration of the sovereign debt crisis. Efforts to resolve the crisis are ongoing and details continue to emerge on how the Spanish banks recapitalization will be executed. Meanwhile investors await the verdict of the German Constitutional Court with no immediate relief in sight 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”. Elsewhere US equities have not been overly impressed with initial Q2 earnings results. The all-important forward guidance has given even less cause for cheer and S&P500 equities closed down -0.8%. Today’s FOMC minutes are likely to shed further light on the Fed’s motivation for extending ‘the Twist’ and, crucially, whether actual balance sheet expansion was considered at the June 21 meeting.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank