Article / 05 February 2015 at 10:30 GMT

Daily Shot: This Greek pantomime is getting childish

TradingFloor.com Team / Saxo Bank
Denmark
  • Good signs for Europe's economy – if it sorts out Greek mess
  • Emerging market devaluations going under the radar
  • 'Bacon deflation' hits commodities

By Walter Kurtz

The Greece/Eurozone saga continues as the European Central Bank suddenly removed the ratings waiver that allowed Greek bonds to be used as collateral by banks. Back during the Eurozone crisis, when Greek sovereign debt was downgraded, the ECB waived its minimum rating requirement for Greek debt collateral against loans to banks. Today the waiver was lifted as the ECB made its move in the game of 'chicken' with Greece. 

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The Greek stock market immediately tanked 10% (after hours) as evidenced by the the Greek market ETF.  
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I am not sure what objectives the ECB achieves by doing this now. Negotiating leverage? The whole thing feels just a touch childish.
The ECB can't really force the banks to repay their current loans. At some point the Bank of Greece will have to step in and provide emergency financing that is not shared by the Eurosystem. It will be important to watch what happens to Greek bank depositors - are they moving funds out of Greece?
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There is, amazingly enough, some positive news out of the Eurozone. I know many doubt what I've been saying about the euro area. But if this group of nations finds a way to put the Greek mess behind it - and that's a big if - the region's economy could see some significant improvements. This is particularly true with the ECB keeping the euro and interest rates low. Here are some signals. One is Markit PMI.

Then there's Spain's business output: 

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And surprisingly strong growth in Eurozone retail sales: 

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China's central bank finally eased monetary policy today by cutting the reserve requirement ratio (RRR) by 50bp. The move releases about CNY 600 bn into the banking system. The impact is not dramatic, but symbolically helpful nevertheless. The central bank is now officially in easing mode, following large numbers of central banks around the world. 

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The big question is going to be the yuan. Is Beijing planning to "widen" the trading bands to let the currency fall some more? Just to put this issue in perspective, here is the how much the euro has depreciated against the yuan. This makes Chinese products more expensive in Europe. 

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As I discussed yesterday, the crude oil enthusiasm may have been a bit premature. Today's EIA report showed US crude oil markets massively oversupplied. Inventories are at record levels and production remains robust. 

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WTI futures quickly shed some 9% ... 

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Some emerging market nations continue to devalue their currencies in order to improve competitiveness and preserve FX reserves. Here is Egypt quietly conducting devaluation (EGP is at record lows), with little coverage from the media. 

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And Brazil is letting the real trade lower as the nation fights the currency war with Australia (and to some extent Indonesia). 

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As I discussed last year the dollar strength will hound a number of risk assets, including US corporations. Not only the dollar value of foreign sales will decline but the stronger dollar will make it harder for US firms to compete on price. According to the FT, dozens of large US firms have warned about the dollar hurting revenues. 

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On the commodities front, we are having more "bacon deflation". Below is the Lean Hogs April-15 CME futures contract – a 4-year low. No wonder US consumer sentiment is on the rise! Here is the reason: 

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Since we are on the subject of meat products, beef prices have also been declining from November highs.  

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Now a couple credit-land items from Floating Path:
1. Significant growth in US credit funds, particularly among large asset managers.

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2. Peer-to-peer lending remains tiny in comparison to the overall credit markets. There is certainly tonnes of opportunity for growth and disintermediation of traditional lenders.  

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– Edited by Oliver Morrison

* Walter Kurtz is an alias

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5y
pairstrader2 pairstrader2
"in the game of 'chicken' with Greece. "

exactly what it is. Greek finmin is playing hardball, like he has no idea what the consequences will be or like he doesn't care.
5y
Jim Earls Jim Earls
Greece has nothing to lose? Europe has a lot more to lose?
5y
pairstrader2 pairstrader2
Greece has a lot to lose, so has Europe. This ending in chaos will be catastrophic for everyone. I just dont get how they start negotiation with this attitude (both sides really)

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