Risk Seeks Footing
Despite some initial wobbles at the open, risk appetite has broadly managed to hold on to gains, with key European equity indices all trading higher. Despite some disappointing PMI prints from northern European countries, there remains enough confidence that data globally has started to base. Our new economic forecasts for the next two years reflect a cautious recovery, and the Eurozone is expected to underperform with growth at only 0.1%y/y in real terms for 2013, rising to 0.9% in 2014. For the US, we expect 2.3%y/y and 3.0% for the next two years respectively as well. Asset allocation will remain favourable for risk, though for the FX markets, the growth differentials will perhaps be too wide to ignore in dictating flows. G10 aside, Emerging markets are still expected to lead the way, especially with India and China expecting 7% and 8% growth respectively by 2014. On the policy rate side, Canada, Australia and New Zealand will see material central bank hikes but we remain skeptical whether on an absolute basis the hikes can translate inter underlying currency gains. Commodity-bloc currencies have been favoured throughout the course of monetary programmes over the last few years by G5 central banks, and if the results are starting to show in the US, yield differentials are expected to narrow significantly, again deterring outflows into these markets for US-funded investors. Relative value trades in favour of the ‘AAA’ bloc will, however, remain profitable and we retain a negative bias on the EUR, JPY and GBP in particular as funding currencies. Challenger job cuts, the ADP estimate, and jobless claims data are all scheduled for release today, followed by the all-important BLS payrolls report on Friday. Finally to Greece, newswire reports indicate that Eurozone finance ministers are evaluating whether to continue to repay holders of foreign-law Greek sovereign bonds on maturity. Many of these bondholders escaped a compulsory haircut during the default in March, as CAC clauses could not be retrospectively inserted into these particular bond contracts. The latest twist in the tale suggests that official creditors are unlikely to take a haircut anytime soon, and that imposing further losses on private sector bond holders remains an option. EURUSD traded in a 1/2925-1.2958 range and USDJPY 79.77-80.11.
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UBS Investment Bank