RBA Stays On Hold
Risk was somewhat better behaved overnight as the RBA decision suggested there was no need to hit the panic button yet. However, stocks are mixed across Asia in anticipation of more turbulent waters to come. The RBA remained on hold but its warnings over broader global conditions probably warranted concern. Chinese equities remain lower as investors look for stimulus signs, and Tokyo and Taiwan are the only major bourses in positive territory. Our US Equity Strategy Team have lowered their EPS guidance for the S&P500 as the weaker US outlook, oil prices and dollar strength may affect sentiment in the US. Otherwise, investors remain intensely focused on what form the ECB’s new bond-buying program will take. Despite the US holiday, EURUSD suddenly jumped 60 pips overnight when ECB President Draghi claimed that the purchase of “bonds with a maturity of up to three years would not be state financing”. Yields on 2y Italian, Spanish, and Portuguese debt each fell over 10 bp in response. It is fair to say that the euro’s reaction at the ECB’s press conference on Thursday will be largely determined by the range of tenors which are declared eligible for purchase under the new program. Draghi has previously made it clear that only the short-end of the curve would be targeted, but this still leaves plenty room for interpretation. Clearly, the further out along the curve the ECB goes, the more the euro will benefit (at least on the announcement effect). However, the desire to avoid accusations of monetary financing will likely impose some upper limit on which maturities are declared eligible, as will the need to circumvent issues around the ECB’s seniority. Until the question of seniority is satisfactorily addressed, private-sector bondholders are unlikely to see the ECB as a partner in the bond markets, and this issue ultimately limits how euro-positive the bond buying program can be. It’s worth noting that, although Draghi referred to the possibility of buying out to three-years, other options are still on the table. He spoke of buying bonds with maturities “of up to one year, two years, or even three years”, so clearly the details are yet to be decided. There are several meetings amongst European leaders today, with EU president van Rompuy in Berlin for talks with Chancellor Merkel. Overnight EURUSD traded 1.2582-1.2628 and USDJPY 78.25-78.43.
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UBS Investment Bank