If you thought the Greek tragicomedy is over, you ain't seen
nothing yet, because despite the so-called Friday agreement, the
immediate next step is for Greece to submit its list of reform
measures to the Troika, which will almost certainly result in an
immediate revulsion in Germany's finance ministry, and lead to
another protracted back and forth between the Troika and Greece,
which may once again well end with a Grexit, especially if the
Greek liquidity situation, where bash is bleeding from both the
banks and the state at a record pace, remains unhalted.
Assuming the proposed reform package is agreed upon in short
notice (it won't be), the next step would include detailed
negotiations around the fiscal targets for this and next year and
the required structural reforms to be undertaken. The Eurogroup has
set an end-April deadline for this to be achieved, to be followed
by the final step which is for it to be ratified by the Greek
parliament - not a straight forward task given the outcome from
Friday. Only when passed will funding be released. While this is
being worked on there are concerns about how the Greece government
and the banks will fund themselves over the next two months. There
may have to be flexibility on t-bill issuance and ECB funding, or
an accelerated agreement.
Whatever happens the pressure should remain on the Greek
government, a government which as explained before is already
facing an internal fissure as some of the most prominent Syriza
members have very openly spoken up against the "negotiation."
It is therefore not surprising that the ongoing decline in the
EURUSD since the inking of the agreement, and the fact that the
pair briefly dipped below 1.13 this morning - over 100 pips below
the euphoric rip on Friday - is a clear indication that the market
is starting to realize that absolutely nothing is either fixed, or
set in stone. Furthermore, renewed strength in the USD this morning
means that commodities are getting mauled once again, with gold
earlier trading well under $1200, and WTI sliding into the mid-$49
range, and a retest of $48, and lower, may be iminent.
Still, while FX is starting to fade into a pessimistic view,
European indices were buoyed early on by optimism
surrounding a loan deal between Greece and Europe after reports
late on Friday that an agreement had been made with the Eurogroup
to extend financing for a further four months, although dependent
on a series of measures to be proposed by Greece today.
Despite the FTSE 100 opening above its record high closing price
the index has ticked lower since the open, led by the FTSE 100’s
second largest member HSBC (HSBA LN) as shares saw selling pressure
in the wake of weaker pretax numbers in their earnings report.
Peripheral spreads are tighter across the board with Greece
bonds supported by the prospect of a final agreement today with the
Eurogroup despite the Greece stock market being closed today, and
this is particularly evident in the short-end with the yield on the
3y down 248bps. Portuguese, Italian and Spanish yields have also
fallen once again today as optimism spreads to other member states.
Looking ahead focus will be on whether the measures put forward by
the Greek government are accepted as adequate, particularly by
Germany, and tier 1 US data later data with Existing Home Sales due
at 1500GMT/0900CST.
Asian equity markets mostly rose with the exception of the Hang
Seng (+0%) following the Lunar New Year. Sentiment was bolstered by
Friday’s confirmation of an accord between Greece and the
Eurogroup, which saw the DJIA and S&P 500 post record highs.
Consequently, the Nikkei 225 (+0.7%) outperformed after building on
its 15-yr highs while the ASX 200 (+0.5%) also finished in the
green, after shrugging off a batch of poor earnings. JGBs rose 13
ticks with outperformance observed in the belly of the curve, after
the BoJ bought JPY 400bln worth of debt with maturities ranging
from 5-10yrs.
Weakness in UK financials filtered through into Europe
alongside a weaker EUR with real money account said to be selling
in the EUR/USD pair and as the USD gained ground in morning
trade. Weakness in EUR was also further exacerbated by a
lacklustre German IFO report with the Business Climate component
coming in at 106.8 vs. Exp. 107.7. In terms of option expiries
there is around USD 1bln in option expiries at 1.1320 due to
roll-off at the 10am NY cut. Commodity linked currencies have been
of particular focus this morning with CAD, RUB, and AUD all seeing
weakness in-line with a downward trend in crude futures, as gold
trades at a 7 week low and RUB weighed upon after Russia’s
sovereign downgrade to junk by Moody's late on Friday. On a
technical note AUD/USD briefly broker Friday's low and USD/CAD back
above Friday's high at 1.2565.
WTI and Brent crude futures trade in negative territory
despite opening higher overnight following a bounce-back in the USD
and news that Libya’s Zueitina port has now resumed exports after
being out of action for almost a year, according to
officials. However, heading into the North American
crossover, it has been reported that adverse weather conditions has
halted export. Elsewhere, it was reported that workers at the
Motiva Port Arthur Refinery (largest in the US with a capacity of
600,250bpd) provided notice that they will begin a strike from
0600GMT/0000CST Saturday morning, according to sources. In precious
metals markets, despite staging a modest recovery overnight, the
broadly stronger USD has continued to hamper prices, while copper
traded relatively range-bound overnight with price action subdues
as China, the world’s largest consumer of the red metal, remained
closed for Lunar New Year holidays.
Bulletin Headline Summary from RanSquawk and
Bloomberg
European equities trade in the green in the wake of Friday’s
Greek/Eurogroup agreement, while the FTSE 100 trades lower
following weak earnings from HSBC
USD has gained throughout the session in a pullback of Friday’s
losses, with downside in EUR/USD exacerbated by real money account
selling EUR and weak German IFO
Looking ahead, today sees the release of US Existing Home Sales
at 1500GMT
Treasuries decline as market prepares for 2Y fixed/FRN/5Y/7Y
note sales; Janet Yellen’s Humphrey-Hawkins testimony begins
tomorrow amid demands for greater transparency and accountability
from Fed.
Greek PM Tsipras walks another high wire over the next 24 hours
as he tries to come up with financial measures that satisfy both
the demands of euro-region creditors and his anti-austerity party;
has until end of Monday to complete a list of policies in return
for the continued funding
Spain took the toughest line with Greek Finance Minister
Varoufakis as the bloc forced him to adhere to the terms of the
country’s existing bailout, according to people with direct
knowledge of the talks who asked not to be named because the
conversations were private
Pro-Russia rebels attacked Ukrainian positions with
artillery, mortars and automatic weapons, the Defense Ministry in
Kiev said, as a bomb killed two people at a pro-Ukraine rally in
the eastern city of Kharkiv
Bill Gross’s $1.46b Janus Global Unconstrained Bond Fund
trailed its benchmark in 4Q primarily because it had plowed about
5% of net assets into debt issued by U.S., Russian and Brazilian
energy companies
Obama is picking a fight with Wall Street over the handling of
Americans’ $11t of retirement savings, accusing brokers of skimming
significant sums annually from small investors and urging new
protections against biased financial advice
Denmark’s government rejected a report it could consider
imposing capital controls as policy makers and economists try to
explain the mechanisms through which the nation’s currency regime
operates
Sovereign 10Y yields mostly higher. Asian, European stocks
higher; U.S. equity-index futures fall. Crude falls, WTI trades
below $50/bbl; gold and copper lower
US Event Calendar
8:30am: Chicago Fed Nat Activity Index, Jan., est. 0.05 (prior
-0.05)
10:00am: Existing Home Sales, Jan., est. 4.95m (prior 5.04m);
Existing Home Sales m/m, Jan., est. -1.8% (prior 2.4%)
10:30am: Dallas Fed Mfg Activity, Feb., est. -4.0 (prior
-4.4)
* * *
DB's Jim Reid concludes the overnight event
summary
By tomorrow night will we be leaving Greece behind for a while
and fully focusing on Mrs Yellen's important semi-annual testimony?
Well to a degree yes but there is a lot of unfinished business with
regards to Greece even if Friday's agreement provides the first
step towards the can being ushered a little further along the ever
winding road. It seems Greece were largely forced to back down in
their pursuit of a more favourable deal as their banking system
could have collapsed any day without an agreement and there was no
obvious domestic contingency plan for a Greek exit or a huge
electoral desire for it.
However as DB's George Saravelos suggested in a note over the
weekend "the road ahead remains long, and it remains unclear how
the current government can navigate between the commitments it has
made to Europe with competing domestic political demands – both
internally within the SYRIZA party as well as with the electorate.
A small step has materialized, but the hard work is about to
begin". Summarising briefly the next steps, today Greece will have
to submit a list of "reform measures" it plans to undertake.
Assuming this gets agreed the next step would include detailed
negotiations around the fiscal targets for this and next year and
the required structural reforms to be undertaken. The Eurogroup has
set an end-April deadline for this to be achieved, to be followed
by the final step which is for it to be ratified by the Greek
parliament - not a straight forward task given the outcome from
Friday. Only when passed will funding be released. While this is
being worked on there are concerns about how the Greece government
and the banks will fund themselves over the next two months. There
may have to be flexibility on t-bill issuance and ECB funding, or
an accelerated agreement. Whatever happens the pressure should
remain on the Greek government.
Overnight DB has also published its latest House View which
includes a special report looking at Greece in more detail. The
report notes that a request for a bailout extension was the first
step in what is likely to be a difficult path to compromise and
breaks down the various approval steps and negotiation processes
that are now upcoming. The piece also touches on why a Greek exit
is a negative outcome for both parties and provides some details
around how Europe is better prepared than in the past and why
contagion risk is lower.
Before we move on, it’s interesting to see reports over the
weekend suggesting that we may already be seeing the first signs of
tension within SYRIZA following Friday’s agreement. Reuters has
reported that a veteran member of the party has accused the
government of creating an ‘illusion’ to voters before going on to
apologise to Greek people himself for participating. As mentioned
there is still a lot of work ahead and tensions domestically in
Greece will be one of the many issues facing the current Tsipras’s
government.
Refreshing our screens quickly this morning, bourses are largely
trading firmer. The Nikkei (+0.52%) has extended recent gains and
the Kospi (+0.29%) and ASX (+0.45%) are both higher. The Hang-Seng
(-0.05%) is relatively subdued meanwhile. The Euro is largely
unchanged.
In terms of the market reaction on Friday, with the announcement
coming after the European close the impact was most felt in the US
where the S&P 500 in particular bounced off intraday lows of as
much as -0.6% to finish +0.61% at the close. The new level marked a
fresh record high. Elsewhere, credit markets closed firmer with CDX
IG nearly 1bp tighter whilst the Euro bounced off intraday low of
$1.128 to finish at $1.138, +0.11% on the day and +2.2% off the
pre-announcement lows. US Treasuries weakened into the close
meanwhile to pare back earlier gains with the 10y finishing
unchanged at 2.112%. Oil markets took a backseat as Brent finished
unchanged and WTI fell -1.97%. The latest Baker Hughes rig count
meanwhile showed the number of operating rigs falling by 37 last
week – although this was the smallest drop in seven weeks.
It was a quiet day data wise in the US with just the preliminary
February manufacturing PMI which came in above consensus (54.3 vs.
53.6 expected). This week however we’ve got a fairly busy calendar.
We’ll run through the details at the end of the report however away
from Greece, Fed Chair Yellen’s semi-annual monetary policy
testimony before the Senate Banking Committee tomorrow night and
the House Financial Services Committee on Wednesday night will no
doubt attract much attention. Our US colleagues expect the
testimony to, in large part, reflect the recent FOMC minutes
however the latest payrolls print could mean we see a more upbeat
view of the US economy. Will Yellen make a case to congress that
time is approaching for the Fed to begin the process of policy
normalization? When Yellen is about to speak we tend to have a bias
towards thinking she'll be fairly dovish and with inflation where
it is globally at the moment this is likely to hold back any
negative shock tomorrow night.
Indeed central banks continue to be the main driver of our view
for 2015 and we're continuing to see the impact on credit which
supports our bullish view in Europe, especially for the weaker end
of HY. Indeed the latest fund flow data is impressive. Having seen
almost exclusively weekly outflows in the second half of 2014
European HY funds have seen a notable turnaround at the start of
this year. Despite a slow start to the year as the first week of
January saw further marginal outflows we have now had 6 consecutive
weeks of inflows, totaling $2.6bn on a cumulative basis. This has
included the two strongest weeks (in notional terms) ever within
the data set going back to 2004. To put this number in context in
the second half of 2014, a period when we saw just 6 weeks of
inflows, total net cumulative outflows were $4.3bn. So the flows
seen so far this year seem impressive in light of how negative the
second half of 2014 was. In notional terms flows in the first 7
weeks of this year are also ahead of the $2.1bn of inflows seen
during the same period in 2014 and comfortably ahead of the $1.2bn
seen at the start of 2013. It’s also worth noting that the 4-week
moving average is also at a record level ($541mn) in notional
terms. That said given the strong growth in the size of European HY
market in recent years on the back of record issuance levels the
inflows as a percentage of NAV aren’t quite as impressive. Although
that’s not to say they aren’t still fairly strong. YTD we have seen
+5.4% which is not as strong as either 2014 (+6.6%) or 2013
(+7.5%). The outflows seen in the second half of 2014 accounted for
around 10.4% of NAV. The trend in US HY fund flows is broadly
similar with the 4-week moving average also at record level from a
notional perspective while even as a percentage of NAV the current
level is at a near 3 year high. That said something else worth
considering is the strength in issuance this year. YTD European
currency (EUR and GBP) non-financial HY supply (based on our
calculations) is around €4bn ahead of each of the two previous
years which both ended up being record years. Issuance is often a
sign of market strength and demand so its difficult to be too
worried on this but its worth being aware of.
Rounding off markets on Friday, equity markets in Europe traded
in a fairly volatile fashion for most of the day before closing a
touch firmer ahead of the conclusion of the Eurogroup. The Stoxx
600 (+0.23%) and DAX (+0.44%) finished higher whilst yields in the
periphery ended 3-5bps tighter. Greek equities finished -0.27%. As
well as the obvious attention on Greece, data flow on Friday
attracted some interest with the release of PMI indicators for the
region. In terms of the overall Euro-area print, the composite
reading (53.5 vs. 53.0 expected) ticked up +0.9pts supported by a
higher services (53.9 vs. 53.0 expected) reading. The manufacturing
print (51.1 vs. 51.5 expected) meanwhile increased a tenth of a
point but came in below expectations. Regionally, the services
reading improved in both France (53.4 vs. 49.9 expected) and
Germany (55.5 vs. 54.4 expected) although manufacturing prints for
the former (47.7 vs. 49.6 expected) and latter (50.9 vs. 51.5
expected) disappointed.
Before we take a look at this week’s calendar, on Friday Moody’s
downgraded Russia one notch to Ba1 and kept them on negative
outlook. The current crisis in Ukraine, capital outflows and rising
risks of political shocks impacting debt service payments all
appeared to play a part. In terms of the latest on the Ukraine
crisis, the FT reported over the weekend that Ukrainian troops and
Russian-backed separatist exchanged prisoners and began to pull
away heavy weapons from the front line in certain regions. However
reports of explosions at a pro-Ukraine rally on Sunday continue to
test the agreements put in place.
Taking a look at this week’s calendar, it’s a quiet start in
Europe with just the February German IFO survey due whilst the
ECB’s Mersch is also due to speak. In the US however this afternoon
we’ve got the Chicago Fed national activity index, along with
existing home sales and the Dallas Fed manufacturing activity print
for February. Turning to Tuesday, the only notable release in the
Asia timezone is small business confidence out of Japan. It’s a
busier day in Europe tomorrow however. The final Q4 GDP report is
due out of Germany along with the various trade data prints for the
region. As well as this we’ve got the January inflation readings
due out of the Euro-area with the market expecting a -0.6% yoy
headline reading and +0.6% yoy core print. Focus on Tuesday in the
US however will likely be on the aforementioned Yellen’s
semi-annual testimony speech (formerly Humphrey-Hawkins). Elsewhere
in the US tomorrow will also see the S&P/Case-Shiller index,
consumer confidence and also the Richmond Fed manufacturing print.
We start Wednesday in China with the preliminary February
manufacturing PMI print whilst in Europe we’ve just got French
consumer confidence due. In the US on Wednesday we have the
conclusion of the semi-annual monetary policy meeting as well new
home sales data due. Thursday starts with consumer confidence and
unemployment data in Germany, along with money supply data for the
Euro-area. Later in the morning we also get GDP data in the UK
along with confidence indicators for the Euro-area. Over in the US
the main focus for the market will most likely be on the inflation
print for the region with the market looking for a +1.6% yoy core
print. As well as this, durable goods orders, capital goods order,
initial jobless claims, Kansas City Fed manufacturing index and
FHFA house price index are due – so plenty to keep an eye one. We
round out the week in Japan with housing starts data whilst in
Europe preliminary February inflation data for Germany will be of
focus. The ECB’s Constancio is also due to speak. In the US we
close out a busy week with the Q4 GDP reading as well as pending
home sales and the University of Michigan index.
