Summit Watch
Risk appetite remained resilient heading into the EU Summit, with the equity markets in Europe and the US gaining on the back of positive economic data and hopes of policy stimulus. The moderation in the Germany CPI print for June to 1.7% y/y (-0.1% m/m) fanned expectations of further monetary easing by the ECB in its next policy meeting on July 5. The latest Reuters poll indicated that 48 out of 71 economists believe the ECB will cut its benchmark rate next week, with the median pegging a 25bp move. Rate cut hopes were further supported by ECB Executive Board member Peter Praet’s comment that there is “no doctrine that interest rates cannot fall below 1%”, though he acknowledged that a cut would only have a limited impact on the economy. Earlier, on the data front, the June Italian business confidence index jumped to 88.9 from 86.2, beating expectations and halting a three-month slide. Spanish retail sales dropped by 4.3% y/y in May, less severe than the 11.3% drop posted in April. In the US, durable goods orders rose 1.1% m/m n May and the details of the report suggested greater resilience in activity than had prior reports. The US pending home sales index rose 5.9% m/m in May, reversing April’s 5.5% decline, enough to push USDJPY modestly higher. Chicago Fed President Charles Evans was on the wires putting forth his case for more QE, noting that the extension of ‘Operation Twist’ would only have “small effects”. We maintain, however, that the Fed is less likely to undertake further easing than other major central banks in the G10 space, underlining our generally bullish dollar view for this year. The focus is now squarely on the two-day EU Summit starting later today at Brussels. Merkel commented that proposals on the ‘growth pact’ and financial transaction tax could be accepted, but reiterated her opposition to any form of debt-mutualisation ahead of her working dinner with Hollande. We still expect the EU leaders to agree on a broad framework, loosely based on EC President Van Rompuy’s report, with the critical details hopefully starting to emerge by the next Summit in the autumn. Market expectations are low, so investors will be wary of any ‘positive’ surprises from the Summit.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank