Risk Rallies, Selectively
The reception to Greece’s bailout deal was mixed on Tuesday. The euro was steady though did not break new ground as it was clear the fixed income market needs to brace for a Greece credit event. However, this was still preferred to an outright default in a disorderly fashion, and the removal of relevant risks was a reason for other risk assets to rally. US stocks in particular were buoyant as the Dow Jones Industrial Average broke 13000 for the first time since the Global Financial Crisis. Even if investors have every reason to worry about the particulars of Tuesday’s agreements, from debt seniority to whether the Troika’s maths on Greece add up, non-Eurozone markets are now expected to grow at a solid pace if financial stability can be preserved. Although we remain highly doubtful that the upcoming process in Greece and future developments in the Eurozone sovereign debt crisis will be orderly, the growth differentiation element alone would be enough to damage the euro as fundamentals based on austerity-alone growth policies are highly unlikely to trigger the growth-seeking flows needed for sustained Euro strength. To ring-fence the rest of the Eurozone in anticipation of a credit event in Greece, we believe the ECB will have little choice but to deploy its balance sheet with greater ambition, pushing its total asset holdings beyond a inflexion point where debasement fears may undermine any gains attained from the financial stability. Without the necessary growth based policies – which are being called for increasingly by leaders in southern Europe – the ECB is the stimulus source of last resort. At this stage, intra-Eurozone adjustment is off the table and with the focus set to stay on Greece in the immediate future, we doubt the Eurozone’s leaders have enough political capital to calibrate policy. Wednesday’s PMI figures will be an initial test of the Eurozone’s growth momentum, and even with ongoing German economic resilience the currency union’s output is expected to show contraction. China flash manufacturing PMI will also affect sentiment through Wednesday’s session, while the UK releases BoE Minutes. Existing Home Sales figures are out in the US.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank