Long Wait To EU Summit
Conviction was generally lacking during the Asia session with still over a day to go before the EU Summit gets underway. The rather muted EURUSD reaction yesterday to French President Hollande’s attempt to put common-issuance Eurozone bonds back on the table suggests markets are adopting a ‘seeing is believing’ stance and will only react to specific policy initiatives or significantly better data. These are in short supply at the moment. While EURUSD did edge higher during the US session investors certainly seem prepared for more euro-negative news. Confirmation that Greece’s Democratic Alliance Party (which captured 2.55% of the vote in the last election, just shy of the 3% threshold required for parliamentary representation) will join forces with New Democracy for the election may offer some consolation for euro bulls hoping that compromises can be agreed to avoid the risk of a hard default and euro exit, but the race is still too close to call. Our latest flow monitors revealed heavy flows among asset managers, which we suspect involved deleveraging from Eurozone assets. Total EURCHF sales were the third largest on record, even exceeding the more violent episodes seen in 2007 and 2010. Hedge fund selling was also the third strongest on record, which points to renewed speculation that a floor-break is possible, despite SNB protestations to the contrary. Moreover, IMM positioning shows euro shorts are at record levels again. While this suggests scope for euro short covering on any ‘positive’ headlines out of Wednesday’s EU Summit, the EU’s Van Rompuy has already warned there are “no quick fix solutions” to the debt crisis and no final decisions are likely to be made this week. Indeed, the point to stress now is that regardless of the measures considered – Eurozone bonds, bank recapitalisation via the ESM, a Eurozone-wide deposit insurance system, or direct demand-boosting ‘growth’ initiatives – the hurdles to forging a consensus remain high. Apart from the European headlines, the focus ahead will be on the UK CPI data. The consensus and UBS expect a 0.6% m/m rise in April, which will see the y/y rate moderate from 3.50% in March – nothing that promises to support sterling.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank