07 February 2012 at 15:20 GMT
Markets are anticipating a Greek accession to Troika demands – but even if Greece signs on the dotted line, many questions remain, including which country will be next to belly up to the bailout bar, and when.
The market enthused later in the European session about the potential for a Greek bailout deal, squeezing Euro shorts back higher toward the higher end of the recent range after yesterday saw the pair avoiding a deep sell-off by the close of the day. But as of this writing, no deal was actually in place – there was only word that Greek officials are working on a final draft of the measures that would be required and that this draft will be discussed later today at a meeting between cooperative party leaders and PM Papademos. Meanwhile EU spreads widened a bit, but equity markets looked complacent and even soured a bit after the open, and the most liquid bond markets sold off heavily from the highs on the day.
As part of the new deal, a new Franco-German initiative is hoping to earmark funds for the Greek bailout in advance, some of which would automatically go to Greek bondholders to avoid the risk of default, while other funds would remain in a kind of escrow in the event Greece failed to fulfill its obligations under the new agreement. This was seen as a way to decouple systemic risk due to unstable bond markets and enforcement of demands on Greek government behavior.
As with every other deal, we have to remember that while it is short-term positive news that Greece could avoid a disorderly, hard default, the ongoing awkwardness of the EU political and central bank framework have hardly budged through all of this, and the risk remains that the spotlight simply shifts to the next shaky sovereign after Greece signs on the dotted line. And as we mentioned yesterday, the social upheaval element in Greece is ever-present, and there is also the risk of a change of heart if snap elections proceed in April and put a new political party in power.
Odds and ends
The RBA’s decision not to move now obviously took the market by surprise, and no concern was expressed on the currency’s level, even if the currency’s strength was mentioned. This took forward expectations for RBA easing sharply lower, with the June Australian 90-day bank-bill STIR plunging 16 ticks in Tuesday’s Asian session. So now the fundamental tailwinds are encouraging the Aussie higher, but let’s see if commodities and risk appetite can also cooperate from here and if the AUDUSD pair can remain comfortable above the key 1.0760 area in the next few days. If it can, it’s not much of a leap to the record high above 1.10 and beyond if risk appetite remains complacent.
Germany’s Industrial Production fell off a cliff in December, registering a -2.9% drop month-on-month and bringing the year-on-year comparison down to +0.9%, the lowest annual growth rate since late 2009. This and the factory orders indicators bear watching in the months ahead, though the most recent PMI’s have shown German manufacturing supposedly edging back into marginal expansion.
A very interesting article over at Bloomberg highlights how the increasing production of US natural gas and even petroleum in recent years is reducing the US’ dependence on foreign energy sources. While this is impressive, it would be more impressive if this development were showing up more convincingly in the US Trade Balance. Watch for the latest trade data from the US on Friday.
The IMF was out urging China to stimulate its economy rather than trimming its deficit and indicated that a shortfall in European demand from a crisis there would require some 3% of GDP in stimulus. Mr. Evans-Pritchard over at the Telegraph covered some of this story and the fall in container traffic at the port of Shanghai in a column from late yesterday.
Looking ahead
UK Inflation
UK headline inflation data has finally begun to fall over the last couple of months after pushing above 5.0% briefly last year. The core CPI (less Energy, Food, Alcohol and Tobacco) has been stickier, but stopped rising before the headline data. Interestingly, a newer survey with only a six years of history, the BRC Shop Price Index (the January data to be released tonight), has shown a more rapid deceleration in retail prices than the official CPI indices (Jan. data for those is next Tuesday), after for years moving in virtual unison with this data. And the last three months in a row have shown falling prices on a month-on-month basis – which has never before occurred since the series began in early 2006. Considering the price wars going on at supermarkets across the UK in recent weeks, the January inflation data may offer another downside surprise and the inflation picture in general may encourage the BoE to move more forcefully this Thursday, particularly given the very low bond yields and lack of concern expressed in the CDS market for British sovereign credit-worthiness, even if the country deserves the kind of official downgrade that the US and France have received from AAA status.
Chart: GBPUSD
Is GBPUSD reaching its maximum potential here ahead of 1.60? Looming not much higher we have the 200-day moving average at around 1.5935, an MA that stopped the rally the last time back in October/November last year. We also have a key central bank meeting this week that may serve as the decisive factor for whether the rally can continue from here or whether the range more or less holds.
Bernanke on tap
Watch out for Bernanke out just as we are posting this (1500 GMT). There is a ponderous, but noticeable rise in anti-Fed rhetoric among US lawmakers, particularly those of a Republican stripe. A couple of months back, there was widespread consensus that the Fed QE3 would arrive around the April time frame of this year, but in the light of the recent data, this would require a whiplash turnaround in the US economic data trends.
Beyond that, watch out for whether the Greek deal proceeds as the market has now essentially priced in. There may be some room for a further squeeze in EURUSD and other Euro crosses if the deal becomes a reality, but the oxygen supply would likely run out rather quickly, as we’ve gone an awfully long way to begin with and the market’s terminal short-sightedness has somehow also temporarily forgotten the massive expansion in the ECB balance sheet that is a structural reason to look for Euro weakness to return.
Economic Data Highlights
- Australia RBA Cash Target left unchanged at 4.25% vs. 25-bp cut to 4.00% expected
- Norway Dec. Industrial Production out at -2.2% MoM and -4.9% YoY vs. -1.2% YoY in Nov.
- Norway Dec. Industrial Product Manufacturing out at -0.3% MoM and +0.6% YoY vs. +0.1%/0.0% expected, respectively and vs. +0.4% YoY in Nov.
- Germany Dec. Industrial Production out at -2.9% MoM and +0.9% YoY vs. 0.0%/+4.3% expected, respectively and vs. +4.4% YoY in Nov.
- Canada Dec. Building Permits rose +11.1% MoM vs. +1.0% expected
Upcoming Economic Calendar Highlights (all times GMT)
- US Fed’s Bernanke to Testify to Senate Budget Committee (1500)
- US Feb. IBD/TIPP Economic Optimism Poll (1500)
- US Dec. Consumer Credit (2000)
- US Weekly API Crude Oil and Product Inventories (2130)
- Japan Dec. Current Account Total (2350)
UK Jan. BRC Shop Price Index (0001)