The Greek political leaders are under significant pressure to reach an agreement on needed cutbacks on Monday to comply with demands from the European Union and International Monetary Fund to secure a second bailout worth €130 billion ($171 billion).
After a meeting on Sunday, Mr. Papademos said that the political leaders agreed on some of the basic points of the international lenders’ demands, including spending cuts equal to 1.5% of gross domestic product in 2012 and reduction of supplemental pension benefits to Greek workers. The most difficult terms, where the government hasn’t yet reached agreement, are wage cuts, labour reforms and a plan to recapitalize Greece’s banks.
Prime Minister Lucas Papademos faces a strong internal opposition to the terms requested by the European Commission, IMF and European Central Bank—also known as the troika. Greek government officials say the reduction in wages being sought by the troika will only deepen the country’s recession and widen its budget deficit, because it will reduce both tax revenues and contributions to its teetering pension funds.
Unions representing both Greece’s public sector and private industry have scheduled a nationwide strike for Tuesday in protest against painful reforms.
Wall Street Journal
The Greek political leaders are under significant pressure to reach an agreement on needed cutbacks on Monday to comply with demands from the European Union and International Monetary Fund to secure a second bailout worth €130 billion ($171 billion).
After a meeting on Sunday, Mr. Papademos said that the political leaders agreed on some of the basic points of the international lenders’ demands, including spending cuts equal to 1.5% of gross domestic product in 2012 and reduction of supplemental pension benefits to Greek workers. The most difficult terms, where the government hasn’t yet reached agreement, are wage cuts, labour reforms and a plan to recapitalize Greece’s banks.
Prime Minister Lucas Papademos faces a strong internal opposition to the terms requested by the European Commission, IMF and European Central Bank—also known as the troika. Greek government officials say the reduction in wages being sought by the troika will only deepen the country’s recession and widen its budget deficit, because it will reduce both tax revenues and contributions to its teetering pension funds.
Unions representing both Greece’s public sector and private industry have scheduled a nationwide strike for Tuesday in protest against painful reforms.
Wall Street Journal
The euro continued to lose ground and it was mostly a one way affair in Asian trade today after reaching 1.3206 on Friday due to positive US NFP and employment data. On London open the tune was the same but the rhythm and beat came from Greece. The world is now waiting for Greece to respond to demands by the European Union, European Central Bank and International Monetary fund on economic measures, including wage cuts. For the moment 1.3024 looks solid but very vulnerable. One decisive piece of bad news might snap this support level like a toothpick sending it to 1.2826 in double time – a “default” should do it. On the top side, while 1.3200 sounds like a galaxy far, far away now we think 1.3076 to 1.3123 will be a hard nut to crack.
The euro continued to lose ground and it was mostly a one way affair in Asian trade today after reaching 1.3206 on Friday due to positive US NFP and employment data. On London open the tune was the same but the rhythm and beat came from Greece. The world is now waiting for Greece to respond to demands by the European Union, European Central Bank and International Monetary fund on economic measures, including wage cuts. For the moment 1.3024 looks solid but very vulnerable. One decisive piece of bad news might snap this support level like a toothpick sending it to 1.2826 in double time – a “default” should do it. On the top side, while 1.3200 sounds like a galaxy far, far away now we think 1.3076 to 1.3123 will be a hard nut to crack.
Recap of the Latest Global News
By Cory Vi & Andrew Su on Feb 6, 2012
Markets rallied on Friday after the release of much better than expected US employment data. The non-farm payrolls data showed an increase of 243,000 in January which was well over the median economist’s forecast of 140,000. Furthermore, the unemployment rate dropped to a three year low at 8.3%. Market analysts, who were extremely bearish at the beginning of the year are now making grand announcements such as ‘the stars are aligning’ to push markets higher. The contrarian in us is now extremely cautious and we expect the USD to make a comeback after losing ground last week as the better than expected data has seen the likelihood of further quantitative easing fall. The EURO has retraced lower during the European trading session to as low as 1.3030 after opening in Asia above 1.3115.
In more sobering news, the situation is coming to a head in Greece with the government there expected to respond to the troika and demands by its international creditors for increasingly severe austerity measures within the next couple of days. It has become apparent that Greece is finding it difficult to come to an agreement with its creditors. The IMF has said that a worsening debt crisis in Europe could cut China’s growth in half. In China, Chinese Lunar New Year sales grew at the slowest pace since the 2009 financial crisis and a full 3% lower than last year at 16%. There are increasing signs of slowing consumer spending in China which does not bode well for the increasing numbers of foreign retailers rushing into the Chinese market. The Australian dollar has eased off highs at 1.0796 on Friday to fall more than a cent to as low as 1.0685 today.
US equity markets rose to their fifth weekly gain last week after the release of the much better than expected US employment data. The Dow Jones is now trading at its highest levels since May 2008 as financial and technology companies gained more than 3%. The S&P 500 closed 1.45% higher at 1,344. Stocks in Asia were largely higher while the continuing Greek tragedy has seen European bourses trading down about 0.5%.
Recap of the Latest Global News
By Cory Vi & Andrew Su on Feb 6, 2012
Markets rallied on Friday after the release of much better than expected US employment data. The non-farm payrolls data showed an increase of 243,000 in January which was well over the median economist’s forecast of 140,000. Furthermore, the unemployment rate dropped to a three year low at 8.3%. Market analysts, who were extremely bearish at the beginning of the year are now making grand announcements such as ‘the stars are aligning’ to push markets higher. The contrarian in us is now extremely cautious and we expect the USD to make a comeback after losing ground last week as the better than expected data has seen the likelihood of further quantitative easing fall. The EURO has retraced lower during the European trading session to as low as 1.3030 after opening in Asia above 1.3115.
In more sobering news, the situation is coming to a head in Greece with the government there expected to respond to the troika and demands by its international creditors for increasingly severe austerity measures within the next couple of days. It has become apparent that Greece is finding it difficult to come to an agreement with its creditors. The IMF has said that a worsening debt crisis in Europe could cut China’s growth in half. In China, Chinese Lunar New Year sales grew at the slowest pace since the 2009 financial crisis and a full 3% lower than last year at 16%. There are increasing signs of slowing consumer spending in China which does not bode well for the increasing numbers of foreign retailers rushing into the Chinese market. The Australian dollar has eased off highs at 1.0796 on Friday to fall more than a cent to as low as 1.0685 today.
US equity markets rose to their fifth weekly gain last week after the release of the much better than expected US employment data. The Dow Jones is now trading at its highest levels since May 2008 as financial and technology companies gained more than 3%. The S&P 500 closed 1.45% higher at 1,344. Stocks in Asia were largely higher while the continuing Greek tragedy has seen European bourses trading down about 0.5%.
Yet another deadline has passed without resulting in an agreement on the terms for establishing a new rescue package for Greece. The 130 billion euro ($170 billion) in emergency funding earmarked for Greece is contingent on the Greek government agreeing to, and abiding by, a program of severe spending cuts to address the country’s chronic overspending.
Patience is wearing thin amongst the “troika” comprised of the European Central Bank, the International Monetary Fund, and the European Commission that will provide and oversee the funding. The mounting frustration was evident in comments German Chancellor Angela Merkel made yesterday before the press in Paris:
“We want Greece to stay in the euro,” she told a news conference. But she added: “I want to make clear once again that there can be no deal if the troika proposals are not implemented. They are on the table, time is of the essence. Something needs to happen quickly.”
Source: Reuters
Australian retail sales unexpectedly declined in December, the first drop in six months, as consumers spent less at grocers and on dining out in an economy where employment growth stalled last year.
Sales slipped 0.1 percent from a month earlier, when they rose a revised 0.1 percent, the Bureau of Statistics said in Sydney today. The result compares with the median forecast in a Bloomberg News survey of 26 economists for a 0.2 percent gain.
The report validates Reserve Bank of Australia Governor Steven’s decision to lower the nation’s benchmark interest rate by a quarter percentage point on Nov. 1 and Dec. 6 to help revive household demand. The central bank’s board meets tomorrow to decide on rates, and most economists predict a third straight reduction.
Bloomberg
Given the markets lack of focus on fundamentals lately, the loonie by all accounts, for a growth sensitive currency is holding its own outright, but for how long? The Loonie has been riding on the coattails of a strong NFP report (+243k and +8.3%) and ignoring its own softer domestic job output print (+2.3k and +7.6%) that supports BoC Carney dovish tone and economic concerns of late.
The market is assuming that the Canadian economy should increasingly benefit as its largest trading partner down south recovers from the recession. Investors are beginning to believe that any positive US data should keep the pressure on for a lower USD/CAD (0.9971). All this from one day out when the market was wondering if the worlds largest economy was slipping back into recession. One stellar NFP print does not make a trend, but it is a start!
Currently, the dollars price continues to lift off last weeks low print of 0.9928. According to the technicals, the daily charts indicate that the loonie is overbought, but selling outright dollar strength seems to remain the order of the day whilst below the four-week trend line (1.0015), risk is lower to 0.9780.
Depending on what Greek rumor dominates the hour, soft Canadian PMI data this morning could have the currency Bulls scatter a period. Its anticipated that the Ivey PMI could come in a tad softer, maybe decline from 63.5 to even below expectations of 58 in January. A softer reading should be able to kick some of this enthusiastic stuffing out of the energetic Bulls on expectations of a dovish turn from the BoC. This will temporarily lead the CAD to under perform the rest of the risk complex.
Loonie
CHF continues to rise despite the EUR’s resilience. The SNB’s pledge to hold the CHF 1.20 cap will soon be tested. Since its inception last September it has worked, however, in the past few weeks’ market sentiment has changed dramatically. China considering greater involvement in EFSF and ESM program has done little to support currency so far.
The market has aggressively been playing the risk reward trade at these levels by selling CHF aggressively and waiting for the imminent announcement. The threat of a deep recession in the problem Euro-zone is only making this trade more difficult to stomach. The region has yet to feel the true impact of the implemented austerity measures to reduce their budget deficits. Euro banks tightening their lending policies to both corporate and private interest over the last three months is putting a tighter noose around mainland Europe. The ECB’s increased liquidity policy is not working.
All of this is pointing towards the Euro sentiment plummeting again-CHF and JPY positive. The Franc’s outright performance against the dollar is not exactly helping the SNB. Bernanke’s dovish tone has driven the yield spreads between the US and Swiss even lower and made the CHF more attractive. It seems that all the cross bounces are giving investors better opportunities to own the currency or pare their offside positions outright. Intervention again is the risk, however, the rumored $20+ “yards” of stop-loss orders below the cap figure should be cleaned out if the SNB wants to teach the market an expensive lesson.
Below are some other highlights of the week:
EUROPE
- EU: The dollar opened the week much stronger against EM and G10 currencies. The risk selloff started during the Asia session, as markets re-opened after the Lunar New Year holiday.
- EU: Italy issues +€7.5b in 2016-2022 bonds ahead of their largest redemption for 2012 (February 1st +EUR25b). The auctions were well received, however, post interest saw the ECB buying product.
- EU: Portugeuse 5-year product manages to record the highest yields for the post-Euro era of +22.69%, fueled by the turn of events in Greece. The market perception seems to accept a Greek default as a given.
- EU Summit: A leaked German proposal for Greece to cede control over its budget in return for financial aid “casted an uncertain outlook on PSI negotiations.” Market continue to question “the soundness of the recent risk rally.”
- WSJ reported that a Greek PSI deal ‘may’ be concluded this week. This of course is subject to Greece securing a new financing program from the IMF and EU.
- EU: Mixed European confidence surveys contributed to softening risk appetite at the beginning of the week. Services confidence improved while industrial confidence failed to pick up from the recent lows.
- EU: Unemployment in the Euro-zone hits a record high +10.4%.
- EU Leaders: They have agreed to accelerate the set up of a full time +Eur500b rescue fund (EMS and EFSF) and backed a deficit control treaty. Initially response saw European sovereign markets responding well to the summit outcome, with Italian 10-year yields reversing about half of the previous sessions rise.
- EU: The brief Euro-summit has been viewed as a success relative to modest expectations, allowing the market to eliminate some event risk for the euro system.
- GRE: Greece PSI remains elusive and is continuing to generate market anxiety.
- CHF: The SNB’s December balance sheet report confirms that policy makers used FX swaps to add CHF liquidity during the course of December last year (+CHF 20b).
- CHF: The SNB’s balance sheet also revealed small changes to the FX reserve breakdown by currencies (EUR’s share from +54.8% in Q3 to +52.1% in Q4-in favor of dollars and GBP). At current levels, risk reward favors long EUR/CHF.
- UK: The market is looking for QE expansion next week in the UK, mostly on the back of money growth remaining very weak. M4 ex-OFC contracted -0.7%, m/m. Net consumer credit declined -£0.4b, while mortgage approvals at 52.9k disappointed vs. the consensus for 54k.
- NOK: Norway’s credit rose +6.7%, y/y, above the consensus forecast for +6.5%. Retails sales growth remains solid in annual terms at +2.6%, y/y. The futures market expects the Norges bank to remain resilient as data support call for rates “on hold” at the next meeting.
- NOK: The Norges Bank will purchase foreign exchange equivalent to +NOK350m per day for the Government Pension Fund Global in February. This amount is not large compared to the historical average.
- EU: Stronger PMI’s in Europe and China allowed risk sensitive deals to pressure the dollar and yen mid-week.
- EU: The Euro-zone PMI was revised a tad higher from the initial estimate to 48.8. Digging deeper, the German PMI was also revised higher, while the Italian PMI at 46.8 printed well above the consensus forecast of 45.3. Spain’s was not to be left behind, its PMI rose to 45.1 from 43.7. The data suggests that the business climate is at least stabilizing in the region, including in the systemically critical periphery countries.
- Scandinavia, UK and CE3 PMI’s increased strongly. In the UK perhaps further QE becomes questionable? Swedish and Norwegian prints swung back above 50 (expansion).
- CHF: In contrast, Swiss PMI decreased sharply to 47.3. They also managed to report a weak retail sale (annual growth rate dropped to +0.6% from +1.8%).
- EU: Consistent rumors that a Greek PSI deal has been struck (with a 72% NPV haircut) has pushed investors to strap on more risk. What about the collective action clauses?
- EU: There are reports that the PSI deal is being held up by differences between Germany and the IMF. When the “collective actions clauses” are being enforced we will get to hear more from the disgruntled creditors. The various posturing by interested parties is in danger of making this the worlds longest ‘expected’ announcement.
- EU: EU Juncker says that Greek PSI talk are ultra-difficult. The lack of tangible progress in the talks seems to be taking a toll on currencies geared to Europe – CE3, Scandis, ZAR, and TRY.
- CNY: Premier Wen has indicated that China is still researching how to participate in the EFSF and ESM program. China supports European effort to stabilize Euro and it may increase their participation via the rescue funds to help resolve the European debt crisis.
- CHF: Bernanke’s dovish tone has driven the USD/CHF yield spreads even lower and is making the CHF more attractive. These cross bounces are giving investors better opportunities to own the currency or pare their offside positions outright. Intervention again is the risk.
- EU: Spain and France managed to issue bonds, at the front end and in the belly of the curve, to strong investor demand.
- GBP: UK construction PMI fell to 51.4 in January from 53.2 (below consensus for 52.5). Manufacturing and services surveys will carry a larger weight for the next BoE meeting (February 9). Analysts are looking for an expansion in the QE program next week based on weak hard data in Q4 and very soft money growth.
- EU: The Euro area services PMI was revised fractionally lower from the flash estimate, it now reads 50.4 vs. 50.5.
- EU: Greek PSI talks continue, with markets increasingly ignoring statements suggesting progress is being made. Latest reports indicate a deal could be submitted to the EU and IMF over the weekend, and approved at a Eurogroup meeting next Monday.
- GBP: The UK Services PMI rose to 56.0 in January from 54.0 in December, the strongest level since March 2011.Next week we get to see if extra QE is to be applied. Unchanged BoE policy or a signal to an end of QE would clearly be positive for GBP as a EUR alternative.
- EU: Euro-zone retail sales fell for a second month in December, down -0.4% m/m and -1.6% y/y. Retail sales is again strong proof that the EUR’s 17-nations are threatening to return to recession, if they are not already there. In the 27-member European Union, sales rose +0.3%; largely due to a +0.4% rise in the UK and a +0.7% uptick in Poland.