Focus Shifts to Greece
Risk was broadly back in play during the European session as markets gradually digested the results of US election result before moving on to other matters. The election itself, contrary to previous predictions, was not very close and an Obama victory was all but priced in well before the session began. The initial round of dollar weakness, Treasury buying and sell-off in equity futures was quickly offset by profit taking, which ultimately reflected the fact that an Obama victory was probably a consensus view beforehand. The Democrats’ stronger than expected showing in the Senate, which they have retained, however does pose issues for the US economy in the medium term as markets will immediately worry about the chances for a bi-partisan agreement amid the debt ceiling debate. We expect this to become a factor in FX markets in due course and Fitch have already warned that a downgrade for the US is likely next year unless measures are taken to address the US’ long term fiscal condition. The ratings agency currently has the US on negative outlook and expect a decision on the rating to be taken at some point late next year. Ahead today, we expect markets to focus on the other key vote, which will be taken by at most 300 individuals in Athens as the Greek parliament votes on austerity measures to win the next tranche of Troika aid. We would attach considerably less certainty to that outcome however − successful passage of the legislation is not a foregone conclusion. However, local Greek media do expect the measures to be approved by a narrow margin – largely because a junior coalition party is preparing to abstain rather than vote directly against the measures. The vote is due before 22:00 GMT and, if it is carried, European finance ministers could approve the release of the next tranche of aid at their scheduled meeting on Nov. 12, although we note that further delay is also possible. Ahead today, ECB President Mario Draghi will be speaking in Frankfurt at an event for co-operative banks. New Zealand unemployment numbers will be out late during the US session. Overnight EURUSD traded 1.2784 – 1.2876 and USDJPY 79.82-80.40.
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UBS Investment Bank