Growth Strains Showing
Activity in Europe may be somewhat tamer in light of market holidays in the UK but investors are under no illusion that the wider market environment will remain challenging in the coming weeks. Eurozone worries aside, weak macro data are starting to proliferate globally. Overnight, FX markets traded thinly in general but the mood in risk was soft – the Nikkei 225 is down almost 2% and other high-beta indices such as Korea and Taiwan fared even worse – all on the back of fears of a wider global economic slowdown. In the US, last Friday’s payrolls report was very weak: total payrolls up 69k (cons. 150k); private payrolls up 82k; unemployment rate up to 8.2% (cons. 8.1%); ‘underemployment’ rate up to 14.8% – effectively conspired to magnify expectations of further Fed easing against the backdrop of a sharp decline in US equities. The 53.5 print for the US ISM manufacturing index also undercut expectations, but the ‘miss’ was relatively small and optimists could seek some solace from the rise in the new orders component to 60.1 in May from 58.2 in April. Perhaps the most telling barometer was the rally in gold, exacerbated by the high degree of short positioning. The upside reaction may be some pricing in of QE expectations, but Fed’s Pianalto said shortly after the jobs report that the weak numbers alone were not enough to change her outlook on the US economy, and at this stage there still doesn’t appear to be a stronger case for more accommodation. USDJPY was also volatile on Friday, as the initial post-payrolls slump gave way to a sharp bounce on market speculation of FX intervention by the Japanese authorities. There was no confirmation by Japan’s MoF, with Vice Finance Minister Nakao simply issuing a “no comment”. Nonetheless, market talk of rate checking and fears of ‘covert intervention’ should keep the USDJPY bears on edge, particularly in the light of the steppedup rhetoric from Finance Minister Azumi. More nervous trading can be expected in the coming week, with the spotlight on the upcoming BoE, BoC and ECB meetings, not to mention Bernanke’s testimony before the Joint Economic Committee. Overnight EURUSD traded 1.2387-1.2442 and USDJPY 78.05-78.27.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank