Politicians At Loggerheads
A Japanese holiday prevented USDJPY from making any further upward progress overnight, but US 10y yields did climb to a 4-month high on Friday, and even higher yields could be in store once the UST market finally opens today. We note that only six weeks after QE2 was announced in November 2010 10y yields had risen almost 100 bp, and a similar reaction in response to QE3 could also lead to some short-term yen weakness. Meanwhile the newsflow in Europe has turned less positive. Spanish bonds, sold off on Friday after Spain’s Economy Minister de Guindos noted that the government will put forward a “new set of reforms to boost growth” – indicating that Spain wants to convince the EU leaders that it does not need a bailout program. The Eurogroup meeting on Friday was largely uneventful but headlines over the weekend laid bare political divisions on how to introduce a pan-European regulatory framework. While EU Financial Services Commissioner Barnier set an “ambitious objective” of having the bank supervisor ready by the yearend, Germany, Sweden and the Netherlands noted that it is an “impossible” and “unrealistic” goal. German Finance Minister Schaeuble said he wants “stress tests” on banks before the transfer of oversight. His Swedish counterpart noted that nations are “far away from reaching a compromise” and the coming months will see “a lot of tough negotiations”. Considering that a single supervisor is a necessary condition before the ESM could start recapitalizing Eurozone banks, a continued deadlock could help put a stop to the recent euro rally. On Friday Egan-Jones downgraded US rating to AAfrom AA. Late on Friday, we went short AUDUSD as a trade recommendation via a 6m option structure.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank