Risk Surges Post-OMT
Sentiment was buoyant during the Asia session as the ECB’s policy announcements, reports of more stimulus from China and hopes for a strong payrolls print today have led to a return into risk assets en masse. 5% in 2012 and from 1.6% to 1.9% in 2013 – making it less likely for any rate cuts in the foreseeable future. As hoped, Draghi announced the modalities of the ECB’s new bond-buying program called Outright Monetary Transactions (OMT). The OMT program will be open-ended and the liquidity created by it will be fully sterilized. It will focus on buying bonds with maturities of between one and three years. Draghi stressed on the strict conditionality of the EFSF/ESM program, noting that the Governing Council could suspend the program for a member state in case of non-compliance. He also noted that the ECB will accept the same (pari passu) treatment as private creditors for the bonds purchased as part of the OMT program. Draghi noted that the program is “an effective backstop to remove tail risks in the Eurozone” which was reflected in the steep fall of 3m EURUSD implied volatility by about 50bp. Spanish bonds, which gained following a successful auction of EUR3.5 bn bonds, rallied further with the 2y yields falling below 3% and 10y yields inching towards 6%. The EUR’s initial reaction was one of minor disappointment as the Governing Council failed to deliver on anything new beyond what was originally leaked regarding the details of the OMT (though further loosening of collateral rules were announced), but the view that the euro is ‘irreversible’ may have been able to generate a similar level of conviction amongst longer-term investors, but now the pressure will be on the politicians to deliver their end of the bargain. Ahead today, US payrolls data is due. Yesterday’s ADP release and employment component in the non-manufacturing ISM have lifted expectations, though our economists expect non-farm payrolls to grow by 135K in August against market expectations of 130k, while the unemployment rate is expected to remain constant at 8.3%. Canada will release its labour market report as well. Overnight EURUSD traded 1.2627-1.2642 and USDJPY 78.86-78.95.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank