No Respite In Europe
Despite limited news flow, risk assets came under further pressure in the European session after some consolidation in Europe. After a reasonably strong auction in Spain, periphery spreads widened again triggering some USD buying in the FX space. EURUSD pushed back below 1.27 while cable continued to struggle, pushing below the 200dma towards 1.5850. After yesterdays surprisingly dovish BoE inflation report, PM Cameron said the BoE has flexibility to do more to support the economy if needed. He said he has asked the Treasury to look into more ways to boost credit for firms, housing and infrastructure. Like BoE’s King yesterday however, he stressed that the biggest risks stem from the Eurozone and urged policymakers to come together and help resolve the crisis. Meanwhile the world press has picked up on yesterday’s reports that the ECB has reduced its lending to Greek banks pending recapitalization. Unnamed sources claimed that four Greek banks might be operating with negative equity capital, prompting the ECB to freeze lending to such institutions and so requiring the banks to turn to the Bank of Greece for Emergency Liquidity Assistance (ELA). The ECB later confirmed that some Greek banks have indeed been moved to ELA from the main operations, but that the recapitalisation would be finalised “soon” – allowing troubled institutions to return to normal ECB funding channels. SYRIZA, which still leads in public opinion polls and is likely to figure prominently in any new government, is still showing no signs of softening its stance on the current bailout agreement. Indeed, party head Alexis Tsipras called for a freeze on wage/pension cuts and all state asset sales until a new government is installed. And despite hopes for a softening of the ‘austerity approach’ in the Eurozone, any ‘growth initiatives’ will likely entail supply-side reform measures, suggesting that those looking for bolder demand-boosting actions from the fiscal side may be disappointed. Today, initial jobless claims are due and the key question remains whether the multi-year downtrend can reestablish itself after several weeks of more volatile prints.
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UBS Investment Bank