Bank of Canada Due
Commentary was at a premium overnight but this did allow the market to focus more on economic developments, and it is clear that Europe is starting to feel the pinch of the global slowdown. Services PMI prints were weak and showed contraction in activity across the board. This will probably increase the urgency for the ECB to act, but also provide justification for them to add to exigent extraordinary measures as some of the macroeconomic difficulties may be arising from blocked transmission mechanisms. Regardless of underlying growth conditions, fixed income markets for the periphery are still performing on an absolute and relative basis. Spreads over core Europe have come in, and Portuguese 10-year bonds also traded under 9% for the first time since last May, though expectations of the ECB being active in countries which have already entered full programmes may be a bit of a tall order. Spreads were also helped by another poor Germany auction which was technically uncovered. More tests for Eurozone sovereign bond markets loom as Spain is due to tap markets for EUR3.5bn tomorrow, but price performance would heavily depend on how much Draghi is willing to divulge at the ECB policy meeting. Otherwise, the Bank of Canada’s monetary policy meeting is due today and is the only highlight of the US session. We expect the central bank to hold rates at 1.0% while maintaining its hawkish bias, despite relatively weak growth, employment and inflation numbers since its last meeting in July. Governor Carney recently noted that growth in Q3 may be slowed by “short-term special factors” and added that “modest withdrawal” of the stimulus may become appropriate. Considering that the housing sector is showing signs of cooling and the BoC expects inflation to rise to 2.0% only in 2013, we expect the central bank to remain on the sidelines this year. Compared to the RBA, the BoC’s job is probably easier at this point given the poor (yet consistent) performance of the US economy over the past few years has not developed in a way to materially affect Canadian expectations, while Australia is now struggling to come to terms with a rapidly decelerating China. European bourses are entering the US open broadly in positive territory, but the same could not be said for Asia as indices like the Nikkei and Hang Seng all suffered significant losses on the back of further deterioration in growth expectations. Overnight EURUSD traded in a range of 1.2502-1.2568 and USDJPY 78.37-78.53.
Click here to read the full report: UBS Morning Adviser America
UBS Investment Bank