Plans for the Greek Private Sector Involvement remain a source of considerable uncertainty for peripheral markets, and the inconclusive result of negotiations over the past few days will leave the EUR and risk complex vulnerable to a large correction. However, the EU economic and monetary commissioner has indicated that authorities are very close to concluding their talks, either later today or over the weekend. Will the market add to the risk trades that have been applied since the Fed, earlier this week, increased its “free money” term length by 18-months? So far it’s been too tempting for the market to refuse and risk is being added accordingly.
The mixed signals from the Euro-zone debt market means investors need to tread with caution. Thus far, ECB liquidity has boosted demand for Spanish and Italian debt. The same cannot be said for Portugal. Peripheral bond yields have resumed their collapse this week, with Italian 10-year yields down -18bp to +5.84%, a long way from that +7% imploding benchmark. Portugal remains the outlier, with yields still under upward pressure. Perhaps if China invested in Europe we would not care so much?
Below are some other highlights of the week:
EUROPE
- EUR: Greek talks were expected to show something of substance last weekend. Not unexpected, this week began with Greece failing to yield agreement on the public sector involvement. Negotiators have been squabbling over the coupon that restructured bonds will carry.
- EUR: The single currency opened lower in the Chinese New Year and despite all the negatives, soared through last weeks highs allowing the techies to start talking about outside weekly reversals as the currency remains elevated.
- EUR: Analysts expect that even a successful conclusion to discussions would still leave the actual degree of private sector uptake unclear. EUR bears are still looking for that top, as default risks will not fully ‘abate’.
- FRF: French January business confidence surprised weak, falling to 91 from 94. The market had been expecting a small uptick, especially after the German IFO and EU PMI prints.
- EU: Portuguese debt worries have resurfaced to add to Greek default concerns.
- EU: Finance Ministers reject Greek debt swap offer, coupon demands too high.
- S&P’s Chambers: Greece ‘In all likelihood’ is down to a selected default. However, this default is not expected to destroy the credibility of EMU.
- EU: Euro-zone flash PMI’s came in firmer than expected with the composite back above 50 after four-months in contraction territory. This suggests that the region ‘should avoid a collapse in output’ and another quarter in the GDP ‘red’. Manufacturing PMI rose to 48.7 from 46.9 and services PMI rose to 50.5 from 49.0.
- GER: Their numbers were strong with manufacturing PMI at 50.9 and services PMI at 54.5. Big picture, data should help the Scandis and CE3 currencies.
- ESP: Spain saw strong demand at its bill auction. Spanish Treasury sold +EUR2.51b of 3-and 6-month bills. The bid-to-cover was high in both issues.
- EU: With Greek PSI negotiations inconclusive, the IMF is pushing for the ECB’s to take a haircut along with PSI as a means of distributing losses back to governments. However, the ECB and German coalition remains opposed to taking a loss on ECB holdings. Expect the heavy peripheral issuance schedule to remain a key factor in keeping the bulls on their toes.
- GER: German ifo surprised higher with the expectations component at 100.9, above the consensus for 99 and up from 98.6 previously (the third consecutive rise) and suggests a GDP growth rate of +0.5% q/q.
- GBP: UK GDP contracted more than expected in Q4, down -0.2%, q/q, vs. -0.1%. The weakness was driven mainly by soft industrial production in October and November and poor services at the start of the quarter.
- GBP: BoE minuets deferred the decision on more QE until next month, as expected. The assessment on the economy was somewhat less pessimistic as members judged the most serious downside risks have abated. However, others understood that the “risks of undershooting the target meant an expansion of the QE program is likely to be required”.
- FOMC: FX risk has rallied following the Fed’s shift to a more dovish policy stance. With US yields holding on to post meeting losses and pricing of tightening being pushed further out in the future has increased the appeal of EM FX.
- HUF: Hungary sold HUF +48b worth of bonds (+13b more than expected). This would suggest that market perception of HUF risk has improved. PM Orban has softened his stance on recent legislation and indicated that he is willing to adjust their policies in order to win financial backing from the EU and IMF.
- SEK: Manufacturing confidence surprised soft, falling to -14 vs. -11. Analysts believe that weak growth and the recent sharp moderation in core-inflation allows for a rate cut by the Riksbank at the next meeting.
- EU: Peripheral bond yields have resumed their collapse, with Italian 10-year yields down -18bp to +5.84% (Friday Morning). However, Portugal remains the outlier with yields still under upward pressure.
- EU: On Friday, Rehn indicated that PSI talks are very close to conclusion, either today or over the weekend.
- EU: Euro area M3 growth has slowed significantly to +1.6%, y/y, from +2.0%.
- CHF: Swiss KoF leading indicator dropped to -0.17 this month from +0.01 in December (ninth consecutive monthly decline and the first negative reading in two years). However, the release is at odds with the recent upward surprise in the PMI back above 50.
- Fitch: Downgrades Belgium, Italy and Spain.
- PLN: Poland recorded above consensus 2011 GDP growth of +4.3%, y/y.
Should continue to attract foreign capital and support the PLN.
Last week’s Euro summit is not sitting well with the market. From the first trading session this week, investors were given the green light to push this currency down to an 11-month low. Rating Agencies continue applying pressure in the background, threatening to downgrade one or all of the Euro-zone members. The absence of the ECB as the “lender of last resort” is hurting risk appetite. Because we are in December, it’s difficult for many participants to strap on massive risk positions in a low-liquidity and volatile environment. This month and year may be winding down, but the heat on the Euro-zone is certainly becoming more intense. Investors are trading up against some key support levels for the currency, levels that when breached could see another decent run to the downside.
Below are some other highlights of the week:
EUROPE
- EUR: Moody’s reiterates that it would review the ratings of all European sovereigns in Q1, joining S&P in noting rising vulnerability without taking the formal step of placing the ratings on review.
- Moody’s: Placed eight Spanish banks on review for possible downgrade, citing domestic economic weakness and an ailing commercial real estate market. These reasons are only ever going to become more dominant with the threat of the Euro-zone dipping into recession come the New Year.
- EUR: It was not a surprise to see that the EU summit and ECB meeting last week has left the euro very vulnerable.
- ECB: They delivered a set of measures aimed at improving banking sector liquidity, and made progress on moving towards a more perfect “fiscal union”. It is suggested that the measures will stop short of ensuring market access for the larger peripheral sovereigns at sustainable rates.
- ECB: They also rejected the notion that fiscal agreement would pave the way for more aggressive bond purchases. This week’s absence has been duly noted, allowing bond yields to push higher without any obvious aggressive ECB response.
- ITL: On Monday Italy successfully auctioned 1-year bills, with a +5.95% yield and 1.92 bid-to-cover ratio.
- EU: German ZEW survey surprised positively (-53.8 vs. -55.2), but remains at very depressed levels.
- EU: The EFSF saw strong demand at its 3-month bill auction, and Spain successfully sold 12 and 18-month bills. Market should not be concerned because of the shortness of maturity.
- UK: Inflation slowed to +4.8%, y/y, in November from +5.0%, and in line with expectations. Core-inflation moderated to +3.2%, y/y, from +3.4% and a touch below the consensus forecast for +3.3%. With monthly gains in core prices remaining firm will pose a risk to further easing by the BoE. However, given weak growth the market is leaning towards an expansion of QE in February.
- SEK: Inflation printed +2.8%, y/y, a tad above expectations of +2.7%, but moderating from +2.9% in October. Core-inflation remained stable at +1.1%, y/y, again a tad above the consensus for +1.0%. With core-inflation printing below the Riksbank forecast for two consecutive months supportive market expectation of a cut at the next meeting.
- SGD: Their employment outlook weakened sharply for Q1 2012. Net employment expectations fell to +16% from +31% in Q4. However, this is still consistent with an increase in employment, albeit at a slower pace, and is in line the government’s outlook for only 1-3% GDP growth in 2012.
- EU: In mid-week, Germany sold +4.18b 2-year notes and paid the lowest yield (+0.25%) for 2-year product since the inception of the EUR. The bid-to-cover was 1.4 versus a four auction average of 1.1. The Italians on the other hand, in contrast, paid a Euro era record yield of +6.47% to sell +EUR3b five-year debt, adding to concerns that an EU summit last week had made little progress in tackling the region’s debt crisis. The country has done little to ally fears over its ability to continue to raise funds at sustainable levels. It’s estimated that they need +EUR220b’s worth of bonds next year.
- EU: The Euro-zone factory output data disappointed, falling on the month (-0.1%) and registering its weakest annual gain in nearly two-years. Production rose +1.3%, y/y, the weakest increase in two-years and well below street estimates of +2.1%. Weakness in the Euros manufacturing base reinforces the regions concerns on the health of their economy.
- UK: Labor market data came in slightly better than expected. While the ILO unemployment rate is stable at +8.3% in October, the jobless claims increased by +3k only. These numbers point to somewhat better job market conditions and a more resilient economy than other indicators would suggest. However, capital markets expect an expansion of the QE program in February.
- EU: Spain sold +€6b of 5’s and 10-year debt, well-above the +€3.5b indicative maximum on offer. This was the second oversubscribed auction of Spanish paper this week.
- EUR: Euro area PMI surveys surprised to the upside, despite expectations for a further drop. The manufacturing PMI rose to 46.9 from 46.4, the first increase in eight-months. Services PMI increased to 48.3 from 47.5. However, with the financial distress and resulting tight credit conditions should limit any further rebounds. Analysts continue to suggest further easing from the ECB will be necessary.
- EU: Euro-zone inflation came in an unrevised +3.0%, y/y, last month. Core-inflation was stable at +1.6%. In its monthly bulletin, the ECB again highlighted substantial downside risks to the economic outlook. Projections now show inflation dropping below +2% next year and to +1.5% in 2013. This is certainly inline with more rate cuts.
- GBP: UK retail sales ex- fuel fell -0.7%, m/m, in November, worse than the -0.4% forecasted. Coupled with positive revisions to previous months, the annual growth rate is +0.5%, y/y, above the consensus for +0.3%.
- CHF: The SNB left EUR/CHF floor at 1.20. Their statement was a carbon copy to the September statement. Inflation forecasts were revised lower. The 2012 inflation forecast was left unchanged at -0.3% while the 2013 inflation forecast was marginally revised by -0.1% to -0.4%. Hilderbrand projects GDP Growth to be at +0.5%, y/y, next year. They are attributing the negative growth risks to “their country’s close relations with the euro area; Switzerland’s economic prospects are highly dependent on how the crisis develops”.
- IMF Lagarde: Crisis escalating and requires assistance from countries outside the EU.
- HUF: The currency is underperforming on the news that the IMF mission chief cut short a visit to Hungary due to disagreements on central bank law and on pension funds.