Risk Appetite Buoyant
The risk environment was more constructive overnight after Moody’s affirmed the Spanish sovereign rating at Baa3, with a negative outlook. The euro had already been trading on a buoyant tone yesterday but received another boost with the announcement. The decision removed an immediate risk that Spain gets downgraded to junk category which could have led to some forced structural selling of Spanish debt by real money accounts. Earlier, the German ZEW October survey showed the current situation index at 10.0 (consensus 11.8) while the economic sentiment index came in better than expected at -11.5 (consensus: -14.9, prior: -18.2). Decreased uncertainty over financial markets was cited as a driver behind the improvement in the leading indicator. EU was also supported by a Bloomberg report which cited two senior German lawmakers, Meister and Barthle, as noting that Germany is open to the idea of providing funding to Spain via the ESM’s precautionary credit line. The precautionary credit line allows member states to continue to access financial markets while tapping the ESM’s credit line as and when required. It carries lesser hurdles and can be implemented faster than a full adjustment programme. German Finance Minister Schaeuble opposed this idea earlier. The lawmakers later clarified their comments saying that they were “over interpreted”. Spanish yields fell marginally on Tuesday. EURUSD was undeterred by headlines from Greece that the government’s negotiations with the Troika hit a deadlock on Tuesday over labor market reforms. Greek PASOK leader Venizelos insisted that “further interventions on labor issues do not help” and the Troika’s insistence on these is misguided. In the US, data continued to positive with industrial production up by 0.4% m/m in September (consensus: 0.2%) and the NAHB housing market index printing 41 in October from 40, the eleventh rise in the past 12 months. CPI rose by 0.6% m/m in September though core CPI rose by only 0.1% m/m. TIC data showed that net foreign inflows into long term US securities rose to USD90 bn in August (consensus: USD48 bn). Ahead today the BoE minutes are due. Our economists expect an unchanged 9-0 vote for QE and the policy rate decision. Also due are the October ZEW survey in Switzerland and September housing starts in the US.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank