Risk Aversion Still Rising
Risk appetite continued to wane during the Asia trading session. With no economic data releases to provide a distraction, investors continued to fret about the escalating Eurozone sovereign debt crisis. Uncompromising remarks from SYRIZA party leader Tsipras didn’t help sentiment when he said that if Europe cuts off Greece’s funding “then we will be forced to stop paying our creditors”. Yesterday’s sudden one-big figure fall in USDJPY didn’t help either, sending the Nikkei-255 over -2.4% lower at the time of writing. Yen bulls have indeed reasserted themselves, with USDJPY losing its footing in the face of the surprise deterioration in the Philadelhia Fed manufacturing index to -5.8 in May from 8.5 in April. This contrasted sharply with the 11-point jump in the NY Fed measure reported earlier this week, magnifying the focus on the Chicago PMI due May 31. Adding to the dollar negativity was the unexpected 0.1% m/m drop in the April index of leading economic indicators, the first decline in seven months. Jobless claims were unchanged at 370k – down 20k from a month ago to reverse most of the April spike – yet are not falling at a sufficiently fast pace to reduce the perceived risk of further Fed easing amid the considerable headwinds in the growth equation. Fitch downgraded Greece’s long-term foreign and local currency ratings to CCC from B-, warning that if new elections on June 17 “fail to produce a government with a mandate to continue with the EU-IMF programme of fiscal austerity and structural reform, an exit of Greece from EMU would be probable. Some solace could be gleaned from the latest poll results, the first to put the New Democracy (23%) ahead of the SYRIZA (21%) and PASOK (13%). The poll predicts the New Democracy could secure 123 seats, which combined with the PASOK’s 41, would produce a comfortable majority. This would be EUR-supportive to the extent it suggests greater scope for compromise on the bailout agreement, at least relative to a SYRIZA-led coalition. Nonetheless, it would be dangerous to put too much faith in one poll in this uncertain environment, where the yen remains a ‘safe haven’. Indeed, the yen crosses still look vulnerable – EURJPY, AUDJPY and GBPJPY, which has been undermined by Prime Minister Cameron’s assertion that the BoE has flexibility to do more to support the economy if needed. The focus is now on the G8.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank