Greece Delays In Focus
Risk appetite had no favours from Europe as the headline flow was not pleasing for those looking for a swift resolution to the issues in Greece. All major bourses are in the red and the EUR had tough session as well, trading in a range of 1.2716-1.2789 while USDJPY also softened to a 79.28-79.60 range. It is all but clear now we will not see a resolution on the next Tranche for Greece before November 12th, with the 16th being the next date mentioned. Given Greece does have a bill redemption on that date, the market is understandably nervous about its cash needs. An EU official was quoted by Bloomberg as saying the Eurogroup ‘had a clear picture of Greece’s cash need’ and said there would be no default on that date. The uncertainty has undermined what should have been a better session after data out of China showed steady improvement in domestic conditions. During the Asia session the Australian dollar (and risk appetite more broadly) found support after China’s CPI for October came in softer than expected at 1.7% y/y (cons. 1.9%). The market read it as providing room for future monetary stimulus, although we do not expect any policy initiatives to flow from this. Elsewhere, USDJPY recovered a little having dropped to a low of 79.32 during the US session after worries about the impending US fiscal cliff intensified. There was no shortage of media commentary on the subject which kept the issue front-and-centre in investors’ minds. Adding to existing concerns, the US Congressional Budget Office forecast that if the cliff happens as planned, a US recession would ensue and the unemployment rate would hit 9.1% by end-2013. S&P waded into the debate saying it sees an increasing chance (up to 15%) that political brinkmanship will push the US over the cliff. That fits with our view that a political compromise is still the most likely outcome, even if we have to wait until the eleventh hour for politicians to find common ground. House Leader Boehner said in an interview that raising taxes is ‘unacceptable’ but he was open to ‘increasing revenue’ through tax reforms. Barring action however, a lot of damage could be done to risk appetite in the meantime – a fact to which yesterday’s price action can testify. UST 10y yields fell sharply particularly in the wake of the Treasury auction, and US equities had another bad day with the S&P500 dropping 1.2%. Bank of Canada Governor Carney still believes the US fiscal cliff can be averted in time, but even he is preparing for the worst. He said the Bank could react rapidly if the US slips into recession, implying that Canadian rate cuts would be a possibility.
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UBS Investment Bank