Spain Concerns Continue
The euro jumped 20-pips on the headline that the EU Commission could envisage direct recapitalization of banks by Eurozone permanent bailout fund (ESM). While the headline is positive, it is not unexpected and it would require a change in the ESM treaty to get the policy through. The commission often champions pro-integration policies which get pushed back by respective governments, so we don’t view the developments as major. Otherwise a further stream of negative newsflow kept the euro under pressure in Europe and widespread risk aversion kept the dollar in demand versus most risk assets. Spain continues to be the source of investor focus, after the Financial Times reported that the ECB has rejected Spain’s plan to finance the recapitalization of its banking sector via the direct injection of sovereign bonds. Subsequent comments from both the ECB and Spanish Government attempted to pour cold water on the story by denying any consultations but with Spanish 10-year yields up over 20bp today and 5y CDS hitting record highs (583 bp) it seems that investors are not willing to reward any policy steps so far.. The Finance ministry added that Spanish banks will need EUR84 bn in provisions.. Yesterday’s ratings downgrade of Spain by Egan-Jones from BB- to B was unsettling too, and serves as a reminder of the heightened market sensitivity to any bearish Spanish headlines. 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. German and UK yields continued to push lower with 10y gilts making another record low. Elsewhere, Swedish GDP surprised to the upside (+0.85 q/q), in line with our views that forward looking data such as consumer confidence suggests that the market has been overly bearish SEK. GBPUSD remains under pressure. BoE data confirmed another month of net outflows from overseas gilt investors (-GBP 1.3 bn), but the move was largely a function of wider risk aversion.
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UBS Investment Bank