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.”
The EUR again has failed to break out of its current range. When its on its knees, down and just about out, Chinese PMI lends a hand in the overnight session. The world’s second-biggest economy has withstood weaker exports driven by the Euro periphery debt crisis and a government-induced property slowdown to give a PMI print of 50.5. A print that still is in expansion territory, no matter if the data may be distorted by a weeklong holiday.
Along with a rise in risk appetite influenced by a ‘whisper’ that a Greek debt deal is imminent, has the EUR testing against its upper range. In truth, it’s difficult to find a diehard Bull amongst us. The market psyche has us believing that most EUR positive moves are supposedly an excellent opportunity to add to the record short positions. These EUR short squeezes are to be treated as an opportunity-no action taken and it becomes a cost! The weak bears certainly hope so.
A successful conclusion to the PSI talks as “promised and expected” will not be the end of the matter-negotiations will remain ongoing. Why? The haircuts being discussed (around 70%) naturally will meet “with very unsatisfactory participation from the perspective of Greek and Euro/IMF authorities for forward looking debt sustainability.” Greece is likely to legislate Collective Action Clauses into the outstanding debt. The objective would be, once legislated, they can be used more coercively to force participation in the restructuring process-In English, whatever is agreed upon, there will be more negotiations required. The nightmare does not end with a successful PSI announcement.
Given that there are so many technical details to be worked out, maybe the market is not fully reflecting the difficulties that are likely to be associated with completing the Greek rescue package. For now, data showing that contraction in the Euro-zone factory activity last month (48.8 vs. 46.9) has slowed is supporting the single currency. Germany remains the outlier, the only country registering a reading above 50, indicating expansion. No matter, investors will wait for the promised Greek PSI agreement before outright celebrating. So, is it buy the rumor sell the fact time now?
The December unemployment rate for the 17-member countries comprising the Eurozone rose to the highest level since the Euro was introduced in 1999. For the month of December, the rate for the entire region rose to 10.4 percent after the November result was similarly revised upwards one tenth of a percent from the originally-reported 10.3 percent.
A total of 16.5 million people across the Eurozone are now out of work. This is an increase of three quarters of a million in the past year alone. But the pain is not being felt equally amongst all Eurozone nations.
Greece and Spain recorded the greatest increase in unemployment over the past year. At 22.9 percent, Spain had the highest unemployment rate for the entire area with Greece not far behind at just over 19 percent. Portugal watched helplessly as its unemployment rate continued to climb reaching 13.6 percent in December.
Comparing the results of these southern countries with the northern jurisdictions reveals the gap between the north and the south. In Germany, for instance, December’s unemployment rate actually fell more than expected to 6.7 percent – the lowest since German was reunited. Meanwhile, Austria and the Netherlands continued to record the lowest Eurozone unemployment at just 4.1 and 4.9 percent respectively.
Unemployment to Increase in Some Eurozone Countries
Looking ahead to the coming year and beyond, there is every likelihood that the situation will actually worsen. As even the most casual observer knows, the Greek government is presently under intense pressure to implement the infamous “austerity” measures to address the country’s widening deficit.
The massive spending cuts targeted to meet the goal of ultimately eliminating the deficit will require Greek authorities to eradicate a significant number of government jobs. Other countries including Spain, Portugal, and even Italy will be forced – to some degree at least – to follow the same agenda in order to get a handle on overall spending.
Widespread job losses will not be restricted to just the government, however; the private sector too will be forced to reduce costs as companies struggle with falling sales. In the face of the continued uncertainty and growing fears of recession, companies will postpone or even cancel all but the most essential new projects, delaying new hiring accordingly.
Again, it will be the southern countries that will feel the effects of this most keenly.
The Brussels Summit ended yesterday with no favourable resolution for the Greek saga leaving the market showing its frustration on the EUR/USD driving it down to 1.3075. Apparently German Chancellor Angela Merkel shared the same frustration with the Greek government’s failure to carry out its economic reform. Euro found its base at 1.3135 during early Asian session and the theme today for Asia was sell dollar. However moving towards the London session we may see EUR/USD take on a different theme in the form of volatility. With a whole battery of macro data expected today from the Euro zone, it may be touch and go. We have German retail sales (MoM); French Consumer Spending (MoM); German Unemployment Change; Italian Unemployment Rate; Eurozone Unemployment Rate. In New York expect Chicago PMI and more importantly US Conference Board Consumer Confidence. Euro support is seen at 1.3120 but the psychological level of 1.3000 is possible if all the ‘bad’ stars align. Top side try for 1.3230.
It’s been a difficult week for the Euro ‘bears’; you get downgraded, receive some suspect economic data and fail to agree on a ‘haircut’ in stone just yet (details over the w/d), yet the currency appreciates +150pts from this years lows and in danger of edging even higher. What’s with that?
Many analysts seemed to have factored in a record single currency low print somewhere in their trading strategy calculations. Is this attainable? Much depends on key issues such as the Greek PSI and the forthcoming Euro-area summit. The currency remains susceptible to possible near term policy risks in Europe and fiscal tightening.
For now, the market remain focused on the ongoing Greek private sector involvement negotiations. There are rumored reports that indicate an initial agreement has been reached on a voluntary restructuring, but uncertainty is likely to persist until it becomes clear how widely private sector participants will adopt the plan.
Below are some other highlights of the week:
EUROPE
Merkel and Sarkozy started the week sounding the trumpets “We must solve Europe’s competitiveness problems”
EU: Greece dispatches officials to the US for meetings with the IMF. The fear of a default and a subsequent euro-zone exit has overshadowed a mass credit downgrade of euro-zone countries. Athens requires a deal with the PSI within days to avoid going bankrupt when +EUR14.5b of bond redemptions fall due in late March. Talks with its creditor remain ongoing.
EUR: The single currency is beginning to lose support from foreign Cbanks. Reserve data for the 4Q in 2011 reveals a weakening in reserve accumulation as compared to previous years. The ‘build (buy EUR’s) to hold down local currencies was nearly “zero”-resulting in a change of global asset prices.
FRF: French Treasury came to the market a day after being downgraded from AAA to AA+ by S&P’s. They auctioned +EUR8.7b of 84-day-357-day T-bills. The issues drew strong investor demand in Frances first bill auction of 2012 with short-term yields rising only slightly from record lows reached in its last auction of 2011.
EU: It was not a market surprise that the EFSF program was downgraded from AAA to AA+ late Monday.
EUR: Stronger set of Chinese growth data managed to push the EUR off this years lows, a couple of days after sovereign credit downgrades. The single currency short term remains elevated!
EU: The EFSF auctioned +€1.5b of 6-month bills, with a bid-to-cover ratio of 3.1 despite S&P’s downgrade to AA+. The Eurogroup has agreed to discuss the implications of trying to restore the AAA status. Spain also issued +€4.9b of 12- and 18-month bills with strong support.
ECB: Euro-zone inflation was revised a tad lower to +2.7%, y/y, from the +2.8% initial estimate. Inflation had been boosted over the past three-months by VAT hikes and electricity prices. The ECB projects inflation to slow to +2% this year. Market does not expect an imminent rate cut. FI is pricing in one for March.
GER: Despite remaining at depressed levels, the German ZEW expectations recovered sharply to -21.6 from -53.8 last month (sharpest increase in history).
UK: UK inflation slowed to +4.2%, y/y, from 4.8% in November, in line with consensus. Last month, the core-inflation happened to fall to +3.0% from +3.2%. Not necessarily obstacles for expanding the QE program, but recent growth indicators suggest the risks are now for less rather than more QE next month.
IMF: Market reports indicated that the IMF will seek to increase resources by $1Trillion, drawing largely on the BRIC economies, Japan and oil exporters. This news provided some risk appreciation and perhaps even more if augmented by a fully functioning ESM. Do not expect automatic or willing contributions!
EU: Negotiations on Greek private sector involvement resumed midweek. It’s been reported that Greece is close to agreeing to pay +32c per EUR of government debt. Aiding the negotiations, Greek officials have signaled increased willingness to use collective action clauses if participation in PSI falls short of 100%.
GBP: UK jobless claims surprised low at +1.2k in December vs. an expected +7k and continuing the positive trends for the unemployment rate. However, the ILO unemployment rate increased to +8.4% from +8.3%.
EUR: The market risk rally remains intact, despite the poor data out of Australia. The CE3 block and Scandinavia currencies continued to outperform on the week.
EUR: There was a successful longer dated issuance in both Spain and France. Spain issued +€6.6b in 5-10yr bonds while France placed +€7.9b worth of 2-4year paper and +€1.5b in inflation linked bonds. Despite the auctions yielding “strong” bid-to-cover ratios, the auctions failed to generate market momentum in FI.
GBP: UK retail sales ex-fuel rose +0.6%, m/m in December. With sales remaining subdued, analysts expect falling inflation to help real consumer income and support future data releases. Cable is expected to remain under pressure.
US data is beginning to highlight the disconnect between the US and the Euro-zone. As FX traders hone their Fixed Income (FI) skills with the Euro sovereign debt issues, even they must sympathize with the frustration of the US bond bears. The benchmark 10-year Treasury yield has defied improving US data, and straddles the +2% yield for most of this year. It’s another crowded market trade that mirrors the frustrations of the ‘short’ single currency strategy. Euro-zone concern remains in the driver seat while US data for now, acts like “Robin” of the relationship. Yields for Treasuries or other ‘safe haven sovereign debt’ are not in danger of rallying any time soon until the Euro-zone stabilizes.
Below are some other highlights of the week:
AMERICAS
US: Martin Luther King Day on Monday was respected by the markets; it was also to be the lead for a quiet beginning of the week, or so we thought. Lack of liquidity led to thin markets, producing volatility that allowed dealers print a new yearly EUR/USD low.
CAD: New Motor vehicle sales fell-1% in November to +137.6k units, offsetting the October and September gains. Truck sales fell -1.3% to +80.4k units.
USD: January Empire State Index on manufacturing conditions in New York of 13.48 was stronger than the consensus of 11. It was a rise from 8.19 in December and a third straight improvement from a series of negatives.
CAD: The BoC, as expected, kept O/N rates on hold at +1%, reporting there is considerable monetary policy stimulus in Canada. Carney sees less slack in an economy that is now expected to return to full capacity by the 3Q in 2013. Inflation was seen as marginally firmer.
USD: US wholesale prices fell in December as food and energy costs declined significantly. PPI (manufactures and wholesales) declined a seasonally adjusted -0.1%. A slowdown of costs may give the Fed more wriggle room. Core-PPI increased by +0.3% (the largest increase in seven-months).
USD: November TIC report recorded a net rise of $59.8B. Foreign holdings saw a large rise from Japan $59.9b and a small decline from china -$1.5B.
USD: December Capacity Utilization increased +0.3pt at 78.1%.
CAD: BoC Monetary Report. There was a major shift in tone in the US outlook that sees US growth forecast improve to +2% in 2012 from +1.7% in the previous MPR. The other main take away is a downgraded Europe forecast with growth now to be in recession territory at -1% in 2012 from +0.2% in the previous report.
BRL: The Brazilian Central Bank (BCB) cut the Selic rate by -50bp to +10.50%. “A moderate adjustment in the basic rate level is consistent with the scenario of inflation convergence to the target in 2012″. BCB seems to be signposting further cut rates. Analysts are expecting another -100bsp by March.
CAD: Canadian Manufacturing shipments advanced at a faster pace in November than forecasted, up +2% to $49.1b. Robust gains were seen in the petroleum and coal industry.
USD: US December CPI ex-food and energy at +0.1% was unchanged.
USD: December Housing starts were weaker than expected with a -4.1% fall to +657k, while building permits at +679k were down a marginal -0.1%. Starts declines were due to a correction lower in multiples.
USD: Weekly initial claims plummeted -50k to +352k, while continuing sank to +3.4m. US data is beginning to highlight the discount between the US and the Euro-zone.
USD: The Philly Fed disappointed with a 7.3 print (10.3). However, there were pockets of strength, business conditions were up, and employment was moderately higher while new orders and prices paid dropped.
CAD: Consumer prices declined in December at the fastest in six-months. On a monthly basis, both the CPI and the core fell in the month, -0.6% and -0.5% respectively. For 2011, Canada’s average inflation rate hit +2.9% (the biggest increase in eight years, 2010 was +1.8%).
CAD: Wholesale trade recorded a surprise drop in November (-0.4% to +$48.4b). The market had been expecting a+0.5% gain.
USD: Existing home sales came in a little lower than expected. Sales rose +5% in December to annualized pace of + 4.61 m units. Housing inventory fell to a 6.2 months supply.
This EUR move is not even a classic case of having to book profits believing that we are witnessing the single currency’s limited potential short term objective. The EUR seems to have run out steam this morning, as investors wait for market tidbits from the debt talks between Greece and its private creditors. Whatever the outcome, it will act as the catalysts for the EUR’s next move, albeit up or down.
This has been a positive news event week for the markets most “crowded trade”. Being short of the EUR outright or on the crosses has been painful over the past five trading sessions. Many of the weaker shorts have exited because of the limited EUR pullbacks. Several successful debt auctions and signs of further action from EU, IMF policymakers-’designed to help avoid a chaotic default’-look to be progressing. However, it is the lack of concrete news from the Greek creditor debt talks, which have entered a third day, that is keeping markets tense for a move in either direction.
Option and sovereign sales ahead of the EUR’s 1.30 handle this morning has temporarily helped cap the topside. Top calling is a difficult gig, especially given the recent squeeze and “this” one directional negative market sentiment mix. The market should now expect further stop losses to have entered the fray. From a technical perspective after moves like this, stop-losses will have begun to be layered below, accelerating selling again in the high 1.28’s. The ease at which the EUR/USD has slipped through the 1.29’s certainly highlights the vulnerability of the single currency at these elevated levels. The bears are pinning their hopes on the Greek debt talks for signs on the next leg of the EUR decent.
The 21-MDA remains at 1.2870-through these levels the market will expect momentum to gather because of the tight stop-losses. Now we are back to ticker watching!
This EUR move is not even a classic case of having to book profits believing that we are witnessing the single currency’s limited potential short term objective. The EUR seems to have run out steam this morning, as investors wait for market tidbits from the debt talks between Greece and its private creditors. Whatever the outcome, it will act as the catalysts for the EUR’s next move, albeit up or down.
This has been a positive news event week for the markets most “crowded trade”. Being short of the EUR outright or on the crosses has been painful over the past five trading sessions. Many of the weaker shorts have exited because of the limited EUR pullbacks. Several successful debt auctions and signs of further action from EU, IMF policymakers-’designed to help avoid a chaotic default’-look to be progressing. However, it is the lack of concrete news from the Greek creditor debt talks, which have entered a third day, that is keeping markets tense for a move in either direction.
Option and sovereign sales ahead of the EUR’s 1.30 handle this morning has temporarily helped cap the topside. Top calling is a difficult gig, especially given the recent squeeze and “this” one directional negative market sentiment mix. The market should now expect further stop losses to have entered the fray. From a technical perspective after moves like this, stop-losses will have begun to be layered below, accelerating selling again in the high 1.28’s. The ease at which the EUR/USD has slipped through the 1.29’s certainly highlights the vulnerability of the single currency at these elevated levels. The bears are pinning their hopes on the Greek debt talks for signs on the next leg of the EUR decent.
The 21-MDA remains at 1.2870-through these levels the market will expect momentum to gather because of the tight stop-losses. Now we are back to ticker watching!
The latest soundbites from Greece point to a threat of Eurozone exit if the Greek Bailout Agreement is not signed. Observers note that this is intended more for the locals to show a strong government reaction to outside forces, but also to enlist their help in tightening their belts with the austerity measures that have yet to be assimilated into Greek daily life.
“The bailout agreement needs to be signed otherwise we will be out of the markets, out of the euro,” spokesman Pantelis Kapsis told Skai TV.
New measures will have to be introduced and based on the previous reactions from the population, it is not expected this moves with anything other than very vocal opposition.
Thursday’s stock market sell-off can be traced directly to a statement released by Fitch Ratings. In this statement, Fitch declared that the U.S. bank exposure to precarious European debt posed a “serious risk”. According to information gleaned from the Bank for International Settlement (BIS), as of the end of 2010, U.S. banks had a combined $41 billion in total expenditure to Greek debt alone. It is thought that much of this is in the form of credit default swaps.
A credit default swap (CDS) is a form of insurance contract that can be bought and sold to offset the risk of a default. The seller of a CDS is obligated to reimburse the buyer if the loan or security named in the CDS contract agreement goes into default. In the event of non-payment of the original loan, it is customary for the seller of the CDS to receive the defaulted loan after reimbursing the buyer of the CDS.
Assuming that Greece is forced into a “partial” default as outlined in the agreement reached late last month, European banks holding Greek debt will be forced to accept a 50 percent haircut. It is likely this will constitute a default and will force U.S. banks that sold CDS contracts to cover the losses.
French Banks on Credit Review
On Wednesday, Moody’s Investors Service turned the market’s attention to France after announcing that it was putting several French banks on review. Credit Agricole SA, Societe General SA, and BNP Paribas were all identified for potential credit rating downgrades due to their high level of exposure to Greek debt.
The Fitch Ratings statement, together with the Moody’s bank review notice, had nervous investors abandoning equities for the safety of the U.S. dollar. By mid-day trading in New York on Friday, the euro had fallen to $1.3520 from $1.3751 at the close of business on Monday.
