Fundamentals much weaker than rallies suggest, claims UBS

Ben Southwood
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RALLIES in the sovereign credit of Asian and peripheral European countries have been driven by central bank cash, without any improvement in economic fundamentals, UBS strategists claimed in a note yesterday.

They warn that Greek default, Spanish banking dysfunction, Chinese growth slowdown, and the US fiscal cliff of spending cuts and tax rises are all reasons to worry that economic conditions could be worsening, contrary to the movements in bond yields and credit default swaps.

Markets had hoped for and expected Italian stabilisation toward the second half of 2012, the note says, after the sharp contraction in the first half – but this is not materialising.

Instead employment, retail sales and credit growth are falling – causing UBS to revise its GDP growth forecast down to minus 2.4 per cent in 2012, having previously expected a fall of 1.8 per cent.

Spain presents just as worrying a picture, the authors say, despite the big drop in bond yields following European Central Bank (ECB) President Mario Draghi’s speech.

The note predicts they will overshoot their 2012 deficit target of 6.3 per cent by 0.7 per cent, pushing growth down to minus 1.6 per cent through the year, after originally forecasting a 1.3 per cent slip in GDP.

Some investors clearly agreed with their analysis, and were yesterday putting pressure on Spain to request aid in order to trigger an ECB bailout, and they drove its 10-year bond yields back above six per cent.

But deputy Spanish leader Soraya Saenz de Santamaria said that the government was still weighing up the costs and benefits of a bailout.