Clouds Gather Before Decisions
The news-flow from the Eurozone has failed to lift market spirits though risk appetite has stabilized as key bourses ended the morning session marginally in positive territory. Despite the rather close passage of austerity measures by the Greek parliament, Eurozone leaders have already warned that the work is far from done and the move lower in core Eurozone yields point to greater concern on investors’ part. Just what such moves are driven by, however, remains in question. The bi-partisan language coming from both sides of the aisle in the US point to a glimmer of hope that the fiscal cliff can be navigated well ahead of time. Even though Eurozone woes have intensified somewhat, investors are still rather reluctant to take on the ECB outright through the periphery bond market as there is the perception that tail risk bets off very limited risk reward. However, as we have seen in the US, lack of resolution in outstanding issues and the specter of problematic fiscal developments will hold back the private sector’s investment intensions. This alone is enough to dampen growth expectations and affect asset markets outright. In essence, ultimately it is about growth and activity, the lack of which is being increasingly factored into developed market economies at this point. Overnight during the Asia session, New Zealand and Australia reported very contrasting employment prints, though on balance we believe shocking New Zealand data will be enough to prompt an RBNZ cut. The RBA move to hold now also looks a bit more justified. The ECB and BoE decisions today will be taken with such headwinds in mind, though we do not expect any headline action by either central bank. Undoubtedly, the ECB will be grilled over the timeline for OMT activation by Spain, but with most of the cards already on the table for central bankers and sovereigns alike, it is hard to see what new information can be attained. In the US, our economists look for a sharp drop in today’s US jobless claims – purely on the back hurricane-related disruption. We would not be inclined to chase any subsequent USDJPY rally as the numbers are due to deteriorate again in the weeks that follow. Overnight EURUSD traded 1.2721-1.2780 and USDJPY 79.78-80.00.
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UBS Investment Bank