Article / 27 April 2015 at 8:00 GMT

From the Floor: Is Greece contagious?

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.

  • Chinese finance minister warns of "middle-income trap"
  • USD soft on weak data, but FOMC could change everything
  • EURUSD vols head higher as Greek talks head nowhere
  • Brent crude soars as Yemen unrest worries shippers
  • Peripheral European bonds catching the Athenian flu

By Michael McKenna

It's a trap!

Speaking live from the Saxo Bank trading desk in Singapore, Christoffer Moltke-Leth tells From the Floor that China's finance minister is worried his country may go the way of Brazil or South Africa.

This weekend, Lou Jiwei told a Beijing forum that there is a significant (50%) risk that China will fall into the "middle-income trap". The term describes a situation where a country's level of development is such that rising wages make it less competitive in the export markets while remaining unable to keep up with the world's most highly developed nations elsewhere. The result, of course, is stagnation.

The People's Bank of China's chief economist was also out with his somewhat more optimistic view, stating that no significant stimulus is likely needed due to strong fundamentals as well as the progress of the country's restructuring plan.

Asian markets traded mixed with the exception of the Shanghai Composite, which – surprise, surprise – rallied by nearly 3%.

Release the hawks

Saxo Bank head of forex strategy John Hardy tells From the Floor that the story behind last week's USD weakness really has yet to be told. Although negative data have put King dollar's "back against the wall", says Hardy, this week's Federal Open Market Committee meeting will provide the real direction. At present, he says, expectations are dovish, but all this could change with a single word.

Looking at some of the recent weak prints from the US, Hardy adds that they are not all as poor as dollar action might imply. While US New Home Sales disappointed last week, for instance, Hardy points out that the levels seen were still up 22% year-over-year...

Could the FOMC take a similarly sanguine stance this week?

US Housing
Mind the gap

Over at Saxo Bank's FX Options desk, head of FX Options and Forward Trading Gustave Rieunier says that the news out of Greece is anything but confidence-inspiring and pessimism abounds. Looking at volatilities, EURUSD vols have inched up from last week and remain vulnerable to any more bad news from Athens.

Given certain imminent data releases from the Reserve Bank of New Zealand and Sweden's Riksbank, Rieunier tells From the Floor that a word of warning may be in order.

Essentially, liquidity in several relevant markets is so thin that these releases could wind up producing serious gaps. Caveat emptor, and sellers beware as well.

Spread like wildfire

Geopolitical risk centred on Yemen is keeping oil prices up, particularly Brent crude. According to Saxo Bank commodities head Ole Hansen, the region's proximity to a major, Suez canal-focused shipping lane makes the troubled nation very relevant to oil traders. These uncertainties have boosted Brent crude, sending the Brent-WTI spread out to 8.21.

With WTI boosted by a plunging US rig count and flattening production, and Brent up on the Yemen fears, Hansen tells From the Floor that those looking to short oil are playing a dangerous game above $60 (Brent) and $54 (WTI).

Greece's gravity

Saxo bank's head of fixed income Simon Fasdal says that, while Greek bond yields may be slightly down, this is not due to any great perception that Athens is preparing to settle its accounts. Quite the contrary, in fact, and Fasdal warns us that things could heat up quickly as the May 6 European Central Bank meeting approaches.

Among the issues at the core of the Greek debacle is contagion, with many investors concerned that Greece's financial woes could spread to the European periphery. According to Fasdal, this is beginning to happen and today's data show a significant negative correlation between German Bunds and Italian bonds.

As for the future? Well, Greek finance minister Yanis Varoufakis followed his participation in a weekend Eurozone ministers' meeting with a tweeted quote from Franklin D. Roosevelt:

"They are unanimous in their hate for me; and I welcome their hatred." 

Hardly conciliatory sentiments.

Suez canal

Shippers looking to transport oil through Egypt's Suez canal 
are growing wary of the situation in nearby Yemen. Photo: iStock

Michael McKenna is a consulting editor at

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