Italy Downgraded
Moody’s cut Italy’s sovereign rating by two notches to Baa2, citing an increased risk that funding costs could rise further possibly leading to a “sudden stop in market funding”. The euro’s reaction was relatively subdued, falling only 25 pips before staging a full recovery. A barrage of China economic data came in slightly ahead of consensus (on balance) and this gave risk currencies a modest bid tone GDP grew by 1.8% q/q (cons. 1.6%) and 7.6% y/y (cons. 7.7%). Fixed asset investment accelerated slightly suggesting the government’s stimulus measures are already bearing fruit and are starting to make their presence felt in the economic data. Meanwhile in the US, the steeper than expected 26k drop in US initial jobless claims (which pulled the 4-week moving average down to 376k) reflected some seasonal distortions, and the muted USDJPY reaction was testament to the high degree of caution which still lingers in the market. A quiet data calendar in Europe today means attention will probably fall on Swiss import prices and Italy’s sovereign debt auction (especially in the wake of the overnight downgrade). The UK Treasury and BoE are also due to announce details of their “funding for lending” programme at 10:00 GMT – a facility intended to channel cheap funding to banks on condition they maintain or even expand their lending activities in the real economy. Attention is likely to focus on the size, cost, tenor, and conditionality of the program. Sterling’s likely reaction is not clear-cut and will depend on the finer details. A greater willingness to lend could boost UK growth prospects and thus prove to be currency-supportive. However, the release of enormous quantities of cheap liquidity would depress market interest rates, undermining sterling’s yield advantage.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank