Another Hurdle Jumped
Wednesday’s German Constitutional Court hearing offered little resistance for the bulls as the market risk-rally continued. As expected, the court ruled the ESM ratifications as constitutional. The added conditions were that German liability must not exceed EUR190 bn without parliamentary approval. Beyond this soft cap, the court is clear that political decisions on European integration and crisis management have to be taken by democratically elected people, which is a very soft stance as there seems to be nothing in terms of constitutional constraints on further integration. It is probably the most market-friendly outcome investors could have hoped for, and we therefore respect the modest rally which has been witnessed in the European morning, since another tail-risk event has been removed from the euro’s path. Focus will now shift to Thursday’s FOMC meeting but it is clear that investors are still aggressively adding to their risk positions and covering their long-established short EUR positions. The European Commission is also due to present proposals for a single banking supervision mechanism in the Eurozone following EC President Barroso’s State of the Union Address in the European Parliament. Elsewhere, the RBNZ will have its policy meeting later today – we expect no change in the benchmark cash rate of 2.5%. Also due is the Dutch election. The latest polls show Prime Minister Rutte’s Liberal Party and the Labour Party running neck-and-neck, albeit well short of a majority. The large pool of undecided voters suggests that the risk of a more euro-negative outcome cannot be dismissed, as any coalition government including either the farleft (anti-austerity) Socialist Party or the far-right (anti-euro) Freedom Party could foster heightened uncertainty over future integration steps in the Eurozone.
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UBS Investment Bank