Risk in Doldrums
Risk appetite overnight was a general continuation of soft trends from Asia, as markets found it generally difficult to price in more positive events. With potential escalation of Middle Eastern tensions in the background, investors are understandably nervous, while progress on other issues also appears to be lacklustre. Ahead today the US Congressional leadership is set to meet on the fiscal cliff, but it is unclear as to how much leeway the leaders themselves can provide without risking a backlash from other sectors of their respective parties. With global growth continuing to weaken, central banks are doing their best to offset any potential growth shocks but there is considerable debate over the way forward as conventional QE gradually exhausts potency. Fed’s Plosser warned overnight that linking policy to macro indicators would ‘create more confusion than clarity’, while Dallas Fed Chairman Fisher – a known hawk – voiced his opposition to a ‘to infinity and beyond’ approach to quantitative easing. Fed Chair Bernanke sounded downbeat on the state of the US housing market overnight. He said that a weak housing market represents a ‘powerful headwind to recovery’, and that a revival of the sector faces significant obstacles. He offered little in the way of fresh guidance, but will have another opportunity to do so when he appears at the Economic Club in New York on Nov 20. Otherwise, USDJPY remains the focus for markets and at the London open, Japan dissolved its Lower House with an election date set for December 16th. The policies of the opposition Liberal Democratic Party, which is expected to take power, will remain under scrutiny but it is difficult to see how much further downside in JPY, either through direct policy or through influencing the BoJ’s discourse, can actually materialise. The overall themes relayed by the LDP in their statements contain little new information and one potential long-shot but credible game-changer, i.e. asking the BoJ to buy foreign bonds, was not included. Instead, the LDP will be looking at establishing a public-private fund for this purpose, which would have far less potency. Today, US industrial production dominates what would otherwise be a sparse data calendar. Overnight EURUSD traded in a range of 1.2725-1.1786 and USDJPY 80.91-81.26.
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UBS Investment Bank