Moody’s Spain Verdict Still Due
Spain’s bank stress tests results showed capital needs at close to EUR60 bn, as expected. Details showed that 7 of the 14 banks tested do not have additional capital needs even under a “highly unfavorable macroeconomic scenario”. Under the baseline scenario, the aggregate capital needs were estimated to be about EUR25 bn. The results were largely in line with expectations and the impact on EUR was fairly muted. However, the benign report removes one immediate risk for Spain. Moody’s decision on Spanish rating is still due. The ratings agency earlier noted the Spanish review is “likely” to continue through the end of September – though Moody’s is not obliged to announce a decision by October 1, and a further extension of the review also seems possible. We note that a downgrade, even by a single-notch, would push Spain’s rating into junk territory, potentially triggering a Spanish bond sell off. With 10y yields already close to 6%, this will put pressure on the Spanish government to accept a bailout package sooner than later – and as such a downgrade need not be hugely negative for EUR. Elsewhere, Fitch Ratings noted that the UK’s AAA faces increased likelihood of a downgrade. In the US, personal income rose less that expected in August at 0.1% m/m while spending rose by 0.5%, in line with expectations. Our economists note that consumption in real terms rose by 1.7% annual rate in Q3, hardly an improvement from the Q2 pace. The University of Michigan confidence index dropped slightly in September to 78.3. Core PCE inflation came in line with expectations at 1.6% y/y in August. USD gained across the board on Friday as risk appetite stayed subdued. Friday’s payroll report will be closely watched this week for future guidance on USD. This week will also see four central banks having their policy meetings. We expect the RBA to cut rates by 25bp on Tuesday, while the ECB, the BoJ, and the BoE are expected to stay put. Ahead today, PMI releases across Europe and the ISM manufacturing data in the US are due.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank