Eurozone Clouds Gather
The euro struggled overnight as the Financial Times reported that the Eurozone’s current deal over the bank bailout deal ruled out the ESM being allowed to provide recapitalization for ‘legacy assets’. According to a joint release of German, Dutch and Finnish finance ministers, ESM bank recapitalizations should ‘only apply to new cases’ and called for banks to use the ESM only as a last resort. If implemented, there will be speculation over the ultimate burden of recapitalization for Spain’s current financial system could ultimately end with the sovereign. With Spain due to release recapitalization needs for its banking system later this week, tension will likely rise over the matter. However, if a silver lining is to be sought, any subsequent rally in bond yields for Spain may cause the government to become more proactive in requesting EFSF support and allow the ECB to activate its OMT, with the usual conditionality laid out in this month’s Governing Council decision. Although the euro is softer on the news, we note that price action has not been aggressively volatile compared to previous rounds of extreme sovereign-driven risk aversion. However, risk appetite is very weak overnight and all key Asian indices are trading significantly in negative territory. Clearly, the afterglow of QE3 has already worn off and in addition to growth worries, markets are now acknowledging that Eurozone-driven risks can only escalate from here, but the lack of positioning to the upside in the euro and the prospect of the key parties falling into line quickly has helped limit additional damage. Ahead today, German CPI numbers are out, along with Swedish activity data. There will also be a general strike held in Greece. Overnight EURUSD traded in a range of 1.2865-1.2913 and USDJPY 77.72-77.82.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank