ISDA Judgement Due
Markets were calm overnight as news of a ‘successful’ PSI allowed was adequately absorbed. The key-short term event is the ISDA meeting at 8:00 ET which will determine whether a credit event has taken place with regard to the Greek deal. Under present calculations, the Greek government announced that 95.7% of private-sector investors would participate in the deal, with CAC activation. This has been widely reported as the biggest sovereign restructuring in history. We still anticipate a credit event to take place, but appears to be already well priced into markets, but this is only one step in the broader Eurozone adjustments which need to take place, and there is less confidence as to how this can progress. Next week the Eurogroup and IMF will likely need to sign off on the entire second Greek bailout plan, with the IMF’s participation of particular interest as their contribution levels are expected to be much smaller compared to previous years. Nonetheless, in the interests of market stability efforts to build a firewall for Europe will probably need to continue, but the risks to the outlook may come from lack of enforcement of the fiscal compact. Without structural change it is hard to avoid the same issues recurring in the future, but the stability the market has witnessed via policy decisions and other contributions may have reduced incentives for the at-risk governments to act and the damage to credibility would remain hard to gauge. In the short-term though, we believe markets will continue to look for consolidation in risk appetite, and this afternoon’s payrolls numbers may be the best catalyst. We anticipate February payrolls to come in at 190k (cons. 210k) while the unemployment rate is expected to remain at 8.3%. Regional PMI numbers have been steady over the past month, and at its current pace US unemployment looks set to trend below 8% heading into year-end, which could cast further doubt on whether the market is justified in anticipating further QE down the line. Overnight EURUSD traded 1.3213-1.3283 and USDJPY 81.30-81.88.
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UBS Investment Bank