Japan Vote Imminent
In Japan, the result of a parliamentary vote on increasing the sales tax is due imminently. The legislation is very likely to pass, but USDJPY could get a significant push higher if the number of “no” votes exceeds 99, as this would imply that at least 54 lawmakers from the ruling DPJ party have broken ranks and have failed to support the bill. Our JGB strategist ascribes a 20% probability to this outcome. Ultimately these dissenters may leave the party, costing the DPJ its majority in the Lower House, and this could precipitate an early election. We expect to hear the final result shortly after 0600 GMT. Meanwhile, expectations continue to fade for a sentiment-supportive outcome to this week’s EU summit. Scepticism was reflected in our latest flow monitor, which showed that our clients continued to add to their short euro positions last week, while overseas investors offloaded a net $2 bn worth of euro-denominated equities – the most since July 2008. Germany remains opposed to any form of debt mutualisation, as Merkel noted that such measures at this juncture would be “wrong and counter-productive”. The ECB’s Weidmann expressed similar concerns, noting that the current proposals for eurobonds, eurobills, and the pooling of risks would only work if member states are willing to give up some sovereignty, an issue that member states receiving EU bailout funds are reluctant to discuss. Press reports indicate that the Summit will “rebuild EMU” and in that spirit, the markets could see grand, headline-grabbing proposals that may look constructive in principle. However, we maintain that risks are skewed towards post-Summit disappointment in the likely absence of any specifics, timing commitments, and hard agreements. Simply put, market fears of bank deposit runs, further ratings downgrades, funding dislocations and even a Greek exit will not be extinguished come June 30. Sentiment was certainly not helped by the formal request for external aid by Cyprus, the resignation of Greece Finance Minister-designate Rapanos, and the downgrading of Spanish banks by Moody’s. Our 1m and 3m targets for EURUSD remain 1.24 and 1.20, respectively. Elsewhere, in the US, new home sales jumped 7.6% m/m in May to an annual rate of 369k, the strongest pace since April 2010. A number of BoE speakers are due.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank