Don’t Overlook US Earnings
FX risk appetite steadied during the Asia session after the US payrolls hangover finally seemed to run its course. AUD, NZD, and to a lesser extent the euro, chalked up some modest gains while USDJPY found a foothold too. Europe remains the focal point of investor attention however: Italy’s MIB fell -5% on Tuesday and Spain’s IBEX35 dropped -3.0% to lows not since March 2009. The S&P500 lost ‘only’ -1.7% by comparison. What happens next will largely depend on developments in Spanish and Italian sovereign bond markets, but the US Q1 earnings season which is now underway will also exert an influence. Any evidence of a strengthening US recovery will go some way to offsetting the negativity surrounding Friday’s weak payrolls report. Bond investors do not seem too hopeful however: the US 10y yield is back below 2% and 10y Bund yields closed at a multi-decade low of 1.64%. The inability of Spain’s fiscal austerity measures to alleviate bond market strains is worrisome, although sentiment was not helped by yesterday’s comments from Bank of Spain Governor Ordonez that Spanish lenders may require additional capital if the economy weakens more than expected. As far as trades are concerned the pullback in USDJPY provides an attractive re-entry point for dip buyers looking for a move up to 85 over the next few months. The substantial risk of another round of BoJ easing on April 27 suggests further upside may be only a matter of time. While a rinban expansion or hike in the inflation goal would be asking too much at this stage, a JPY5 trn boost to the APP would certainly be feasible and sufficient to weaken the yen – particularly if complemented by a removal of the self-imposed maturity guideline on JGB purchases via the APP. For the next 2 weeks however, USDJPY will take its guidance from the US side. Amongst the slew of Fed officials due to speak today, Fed Vice-Chair Yellen has the greatest potential to be market-moving especially given she has been notably absent from the lecture circuit since November. A well-known dove, it would be significant if she too backs away from the use of QE3 as a possible future policy option. The speech entitled “The economic outlook and monetary policy” should provide ample scope to address this specific point.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank