Holding Pattern
Risk assets managed to stay well supported in thin conditions ahead of the US Independence Day holiday. With the ECB and BoE policy meetings due on Thursday and the US payrolls report looming on Friday, investors lacked strong conviction – though the firm euro and gains in equities suggest a degree of cautious optimism. Meanwhile, the Dutch and the Finns reiterated their opposition to using the ESM to buy sovereign bonds in the secondary markets. Finnish officials also demanded collateral in exchange for the Spanish bailout loans from the EFSF, as the temporary bailout vehicle does not give seniority status to its creditors. Merkel’s comment that she “respects” Finland’s stance and that the ESM conditions are to be “negotiated on a case-by-case basis” portends further uncertainty in an environment where one must be prepared for considerable political wrangling – likely to the detriment of the euro. In another reminder of potential political risk, Germany’s CSU party leader Seehofer said that he cannot support limitless German commitments to help solve the Eurozone crisis and cautioned that Merkel’s CDU party cannot command a majority in the German parliament without his support. Elsewhere, the credit numbers in the UK came in mixed. M4 money supply dropped 0.1% m/m in May, increasing the risk of the BoE acting more aggressively on Thursday. Indeed, we are looking for an above-consensus GBP75 bn expansion of the asset purchase programme, which could unsettle GBPUSD. The ECB is also under pressure to react to the ‘positive’ Summit outcome, but our European economics team expects no concessions yet and argues that even a rate cut of 25bp or 50bp would not be a game-changer.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank