Shaky Start To Crunch Week
Risk appetite was soft overnight as markets started a key event risk week in rather defensive mode. There are no immediate catalysts beyond the usual ‘uncertainty’ argument, though it does appear that the political impasse in Greece is starting to be noticed. German paper is now trading at negative yields in the front end as worries over the domestic government’s ability to pass austerity legislation this week begin to rise. In addition, even though the US’ fiscal cliff is a theme investors preferred not to trade off until the threat is material, the end of the US electoral season means the issue itself needs to be confronted. While the political calculations are still in motion, many clients are highlighting the damage to the economic outlook – corporates and households may choose to hold back decisions on investment and spending until the issues at hand are resolved. As a result, an economic impact is potentially already being realized at a time when flickers of recovery in the US economy are being shown. On the other hand, even if such issues are surmounted, the question of monetary policy uncertainty will loom large over markets in the coming quarters. If Friday’s rather tame closing to risk appetite is attributable to short-term concerns, then there is no reason to worry. On the other hand, it may also be a sign that markets are still unable to cope in being ‘risk on’ without accompanying policy stimulus – or even the need for additional stimulus, then we would be looking at structural matters which are far more complicated to resolve, insofar as the dollar’s reaction function to risk will prove very difficult to change. For now, the lack of absolute and relative growth outside of the US is keeping US funds begrudgingly more so onshore, but this drive alone is not enough for the secular move for the greenback against the other majors that we seek. Ahead this week, the RBA will be the first central bank to decide on policy in a crowded policy week – while leadership transitions commence in both the United States and China. Ahead today, non-manufacturing ISM is due in the US.
Click here to read the full report: UBS Morning Adviser America
UBS Investment Bank