More Pain In Spain
The fact that EURUSD was so easily knocked below 1.25 on the ratings downgrade of Spain by Egan-Jones from BB- to B serves reminder of the heightened market sensitivity to any bearish Spanish headlines and the scope for continued disappointment. This marked the third downgrade in May alone by Egan-Jones, a small private ratings agency, amid concerns about the country’s deteriorating public finances and unresolved banking sector problems. Meanwhile, the Financial Times reported that the ECB has rejected Spain’s plan to finance the recapitalisation of its banking sector via the direct injection of sovereign bonds. The rejection raises the prospect of increased Spanish sovereign issuance at a time when investor demand for Spanish paper is waning. Risks would still seem to be heavily skewed against the euro. Wire reports that Bank of Spain Governor Ordonez will leave his post one month early (on June 10 instead of July 12) did not help sentiment in a nervous market still hoping for a bolder policy response, especially in the wake of the 9.8% y/y drop in April retail sales (extending the negative streak to 22 months) and a Bank of Spain report predicting the economy will continue shrinking at least through June. Elsewhere, news agency Xinhua quashed expectations of fresh large-scale stimulus from China: “The Chinese government’s intention is very clear. It will not roll out another massive stimulus plan to seek high economic growth. The current efforts for stabilising growth will not repeat the old way of three years ago”. Earlier, domestic reports had circulated suggesting that bold new stimulus measures were being discussed, but these comments suggested otherwise, pushing the Australian and New Zealand dollars off their session highs. US data were predictably overshadowed by the headlines out of Europe, but there was little support for the growth bulls, as the Conference Board consumer confidence index fell to 64.9 in May, the lowest level since January. The Dallas Fed manufacturing index fell to -5.1 in May from -3.4 in April. USDJPY was largely unaffected, however, with many already looking ahead to Friday’s US employment report for May. Our forecasts are +175k for non-farm payrolls and 8.0% for the jobless rate.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank