Article / 26 January 2015 at 8:49 GMT

From the floor: 'Greece holds the power', says John Hardy

Head of Editorial Content / Saxo Bank
Editor’s note: From the floor takes advantage of's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.

  • Greek news dominates Asian market session
  • FOMC could surprise to the hawkish side: Hardy
  • Saxo equities head Peter Garnry bullish on Euro stocks
  • Hedge funds go 'all in' on gold
  • Greek bond yields soar on Syriza victory

By Michael McKenna and Clemens Bomsdorf

Asia weighs Syriza win

Speaking from Saxo Bank’s trading floor in Singapore, Martin Davis says that the Greek election news dominated the session. According to Davis, once it became clearer that the anti-austerity Syriza party would win, markets weighed whether a majority outcome was likely, or whether the left-wing party would need to form a coalition government.

As it happened, Syriza fell just short of an outright majority, but its relative dominance moved EURUSD significantly with the pair hitting 1.11 in intraday trading. Davis says that that level produced an “appetite for profit-taking” given the large recent declines in the euro, adding that options volatilities spiked on the Greek news.

Elsewhere, Japan posted some strong trade data, with exports up 12.9% versus the 11.2% forecasted by analysts.

“Greece holds the power”

The Greek election, of course, produced some big ripples in forex markets with Saxo Bank head of FX strategy John Hardy saying that it could be some months before the full effects of Syriza’s win are felt.

At issue here are several upcoming deadlines, most notably at the end of February when Greece will signal whether it is fulfilling the terms of its austerity commitment. Hardy adds that this has implications for Greece’s emergency liquidity assistance funding, which Hardy says “is really what’s holding Greece together” and preventing a default.

Further deadlines occur in Match, when a payment to the International Monetary Fund is due, and June when Greece is set to make a payment to the European Central Bank. In Hardy’s view, it is Greece that “holds the power” in this situation… as they say, owe the bank a dollar and the bank owns you, owe the bank a million dollars and you own the bank.

Looking to the euro, Hardy says that EURCHF was stable overnight while EURUSD has bounced strongly off lows in early trading.

This week, the US Federal Open Market Committee is set to meet and Hardy says that there is a risk they will “surprise to the hawkish side”. According to Hardy, the market has lowered its expectations concerning the likelihood of an imminent US rate hike, creating a situation where any relatively hawkish statements from the Federal Reserve could place significant upward pressure on the dollar.

Elsewhere, Hardy points to the Chinese yuan where USDCNH appears poised to jump higher. Although it might not be on markets’ radar, says Hardy, the CNH is quietly weakening and if we break above around the 6.27 level, it will be the first two year-plus high since the 1995 Chinese yuan devaluation for the pair. If we do see a break here, says Hardy, the move will quickly assume prominence.

Looking back to the Greek elections from Saxo Bank’s FX Options desk in Copenhagen, Jeppe Norup points to the effect of the Greek election on EURUSD volatilities, stating that the one-month at-the-money contract opened at 14%, which is the highest level seen since 2011.

Overweight on Europe

In terms of stocks, Saxo Bank head of equities strategy Peter Garnry notes that the Dax index opened slightly down on the Greek news, but the move was ultimately fairly muted.


Dax futures gapped down, but the reaction was relatively restricted in light of the news from Greece. Source: Bloomberg, Saxo Bank

This, says Garnry, allows us some time to reflect on last week’s moves, where the aftermath of the Swiss National Bank’s abandonment of the CHF floor and the ECB’s QE launch raged through Eurozone markets.

Among the concerns boosted by QE were banks, and particularly Italian banks… According to Garnry, the fact that Italy’s four weakest banks rose by 20% following the QE announcement represents the market saying that Italy’s banking sector has the most to gain from the ECB’s easing programme.

Exporters also saw a boost, with BMW up 10% on the declining euro. Not all sectors reacted so strongly, however, with Garnry saying that concerns about fixed-rate insurance products drove life insurance stocks – notably The Netherlands’ Delta Lloyd – down sharply.

Garnry points out that some of European stocks’ initial gains came on the back of the declining currency, pointing out that their apparent outperformance of the US S&P 500 Index falls apart once you adjust for a strengthening dollar and a tumbling euro. Nevertheless, Garnry says that he feels that there are good reasons to be overweight European equities at the current juncture as the QE climate will allow for multiple expansion and provide a strong tailwind for earnings.

Doubling down on doubloons

In the commodities markets, hedge funds are getting increasingly engaged in gold futures and are now holding the biggest position in 25 months while ETF holdings jumped by 50 tonnes since the Swiss National Bank’s announcement. 

Hedge funds are increasing their presence in the gold market. Source: Bloomberg, Saxo Bank

A lot of new longs came into the market, says Ole Hansen Saxo Bank’s Head of Commodity Strategy, adding a warning since “there is now the need for other drivers to take over and take gold forward.”
In the oil market, the positive news is that the rig count continues to fall but so far this has not had an impact on production. “The focus right now is on WTI,” says Hansen. Last week saw the biggest weekly rise in inventories in 18 years and current levels overall mark an 80-year high. 

WTI's discount to Brent is increasing again. Since October the price for WTI crude has not closed above the 13-day moving average and has not really touched the 21-day moving average. 

“We need to see these levels tested before we can start looking for the upside,” says Hansen, adding that it presently looks as if it’s going the other way.

No contagion

The Greek elections had an effect on bond markets with the 10-year Greek yield jumping 34 basis points (trading at 8.5 % currently) while the other peripheral spreads are not moving that much. 

“So, no real contagion in Portugal, Italy, Spain – yet,” says bond trader Michael Boye from Saxo's fixed income desk in Copenhagen, adding that one should watch out for a spillover.
Following the ECB’s quantitative easing announcement, investment-grade credit spreads reached a new all-time low and demand is spreading to euro high-yield bonds.


Syriza supporters wave party flags in Athens; the left-wing party's victory in Sunday's election hit markets hard Monday morning. Photo: Oli Scarff \ Getty

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Michael McKenna and Clemens Bomsdorf are consulting editors at
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