What Should EUR Follow?
The Italy/German 10-year bond spread touched 300 basis points on Monday, the widest since mid-April. Internal Eurozone issues aside, higher US nominal and real yields is expected to affect ‘high beta’ risk assets like Eurozone periphery bonds as much as the traditional carry-intensive names such as Emerging Market currencies. Indeed, periphery paper was treated as carry trades in their own right until recently. Otherwise, weaker Eurozone economies and Emerging Markets share similarities in performance impediments such as fiscal weakness and funding difficulties. The key question though, is whether the euro will continue to be affected by such issues, or will relative bright spots, such as emerging surpluses and ongoing fiscal adjustment, not to mention policy differentials, severely limit scope for downside?
Read the full report: UBS