Europe, US Risk Off After Greece Rejects European Ultimatum, Ukraine Peace Talks Falter

In the absence of any notable developments overnight, the market remains focused on the rapidly moving situation in Greece, which as detailed over the weekend, responded to Europe's Friday ultimatum [39]very vocally and belligerently, crushing any speculation that Syriza would back down or compromise, and with just days left until the emergency Eurogroup meeting in three days, whispers that a Grexit is imminent grow louder [40]. The only outstanding item is what happens to the EUR and to risk assets: do they rise when the Eurozone kicks out its weakest member, or will they tumble as UBS suggested this morning when it said that "the escalation of tensions between the Greek government and its creditors is so far being shrugged off by investors, an attitude which is overly simplistic and ignores the risk of market dislocations" while Morgan Stanley adds that a Grexit would likely lead to the EURUSD sliding near its all time lows of about 0.90.

That, the ongoing Ukraine "peace talks" which are rapidly going nowhere and in fact have already managed to splinter Europe and the US [41](as well as sow internal European discord) and the collapse of Chinese imports, and weaker than expected exports, reported over the weekend leading to a record high trade surplus, is what is on traders' minds this morning.

As a result European equities (Eurostoxx50 -1.21%) trade in the negative territory across the board with concerns and uncertainty surrounding Greece weighing on sentiment after Greek PM Tsipras rejected terms on the bailout extension. This also supported a bid in core fixed income as Bunds trade with gains of over 50 ticks breaking above Friday’s high, with the prospect of lower bond issuance this week also supporting upside. The GR/GE 10Y spread is wider by around 68bps and ASE down over 5% indicating the dampened optimism in Greece after being downgraded at S&P to B- from B whilst Moody’s put the country’s Caa1 rating on review for downgrade on Friday. Weakness in equities was further exacerbated after reports that Hannover, Hamburg & Stuttgart airports face delays due to strikes sent DAX heavyweight Deutsche Lufthansa (-2.4%) lower and caused selling in the DAX (-1.52%) after a technical break below 10,700. Furthermore, the DAX was further compounded by JPMorgan downgrading the index.

Despite the data printing a record surplus, exports and imports declined more than expectations, with the import reading falling the most since May’09. Hang Seng (-0.6%) and Shanghai Comp (+0.6%) initially fell, although the latter has now pared back its losses, with sentiment lifted by today’s trading trial of options on the China 50 ETF by the Shanghai Stock Exchange. Nikkei 225 (+0.4%) managed to eke out gains after benefiting from a weak JPY.

In FX, CHF saw some weakness in early trade with weekend comments from SNB’s Jordan stating that that the central bank are not yet at their limit in regards to negative interest rates prompting further speculation of additional action by the SNB. Overnight, AUD underperformed in the wake of Chinese trade data with imports from Australia to China falling by 35.3%, however has been bid in the wake of Australian PM Abbot winning the confidence vote by 61-39 votes. The USD-index (-0.11%) was initially weaker overnight but has trimmed some its earlier weakness on little fundamental news with major pairs coming off best levels.

WTI crude futures have remained around the USD 52.00 level during the European morning and trade in modest positive territory with the USD-index trading lower by 0.11%. Elsewhere Libya’s largest export port, Hariga, has been closed due to a strike by security personnel resulting in production falling to 300,000/bpd for the country. In precious metal markets, much of the movements have been technical with gold (+0.6%) higher after touching its 50DMA, while silver (+1.8%) outperforms the metals complex after failing to make a sustained break below its 50DMA and 100DMA. Following the rejection of the contract terms by the United Steelworkers union from Shell, discussions are set to resume on February 10th. (BBG)

In Summary: European shares stay lower, though above intraday lows, with the autos, banks underperforming and basic resources, oil & gas outperforming. Greece’s Tsipras reaffirms bailout program rejection in address to parliament yesterday. Ruble rallies, Russian inflation set to slow, central bank governor says. Merkel due to meet Obama today in Washington. The German and Italian markets are the worst-performing larger bourses, Switzerland’s is the best. The euro is little changed against the dollar. German 10-year bond yields fall, Greek yields increase. Commodities gain, with nickel, zinc underperforming and natural gas outperforming. U.S. mortgage delinquencies, foreclosures due later.

Market Wrap:

S&P 500 futures down 0.5% to 2043.2
Stoxx 600 down 0.8% to 370.2
US 10Yr yield down 6bps to 1.9%
German 10Yr yield down 5bps to 0.33%
MSCI Asia Pacific down 0.1% to 141.2
Gold spot up 0.6% to $1241.6/oz
3 out of 19 Stoxx 600 sectors rise
17.7% of members gain, 81.3% decline
Asian stocks little changed with the Shanghai Composite outperforming and the Sensex underperforming.
MSCI Asia Pacific down 0.1% to 141.2
Nikkei 225 up 0.4%, Hang Seng down 0.6%, Kospi down 0.4%, Shanghai Composite up 0.6%, ASX down 0.1%, Sensex down 1.7%
Euro down 0.04% to $1.1312
Dollar Index down 0.04% to 94.66
Italian 10Yr yield up 5bps to 1.63%
Spanish 10Yr yield up 3bps to 1.52%
French 10Yr yield up 3bps to 0.64%
S&P GSCI Index up 0.9% to 413.9
Brent Futures up 0.2% to $57.9/bbl, WTI Futures up 1.1% to $52.3/bbl
LME 3m Copper up 0.6% to $5683/MT
LME 3m Nickel down 0.2% to $15200/MT
Wheat futures down 0.6% to 523.8 USd/bu

Bulletin Headline Summary from Bloomberg and RanSquawk:

European equities (Eurostoxx50 -1.21%) trade in the red amid Greek PM’s Tsipras refusal to accept the EU’s anti-austerity proposals ahead of the Feb 16th bailout extension deadline.
Looking forward, sees no tier 1 data scheduled with market focus solely on any ongoing developments regarding the discussion between the EU and Greece
Treasuries gain led by long end as global stocks decline amid Greece concern after the country’s prime minister reaffirmed his rejection of nation’s bailout before Wednesday’s emergency meeting of euro area finance ministers.
Greek prime minister Tsipras vowed to increase the minimum wage,restore the income tax-free threshold, halt infrastructure privatizations, and ask for World War II reparations from Germany
Germany posted a record current-account surplus in 2014, setting the stage for renewed international calls to address its economic imbalances
Ukraine’s almost yearlong conflict enters a pivotal week, with the outcome of more talks on a peace agreement potentially determining whether a wider war can be avoided as violence escalates
Intimidation of the Baltic states, pressure on the former Soviet republic of Kazakhstan, warmer ties with Greece as a way of dividing the European Union -- all are potential options for the former KGB agent bent on recasting the world order
Bank of England Governor Mark Carney said the U.K. is just beginning to see a pickup in wages, a key metric for policy makers as they debate the timing of the first interest-rate increase since 2007
Finance ministers and central bank chiefs from the G-20 agree that monetary policy needs to stay accommodative until the outlook for economic growth improves, according to a draft communique obtained by Bloomberg
Greece topped the list of worries for finance ministers and central bankers from the G-20, with concern rising that the Mediterranean nation’s membership of the euro has never been more tenuous
Sovereign yields mixed, with Greece 10Y surging nearly 70bps to 10.79%. Asian, European stocks, U.S. equity-index futures fall. Brent, WTI, gold, copper rise

US Economic Calendar

10:00am: Labor Mkt Conditions Index Change, Jan. (prior 6.1)
TBA: MBA Mortgage Foreclosures, 4Q (prior 2.39%)
Mortgage Delinquencies, 4Q (prior 5.85%)
4:00pm: Fed’s Powell speaks in Washington

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DB's Jim Reid concludes the overnight recap

If you haven't left for work yet and like me you're a big Breaking Bad fan then you may want to consider returning back to bed, firing up the internet and watching this morning's world premier of hotly anticipated spin-off show "Better Call Saul". After last night's speech by new Greek PM Tsipras, even the infamous Breaking Bad lawyer might be scratching his head working out how we end up getting an imminent compromise between Greece and the EU. This week's emergency Eurogroup meeting on Wednesday looks likely to be a tense affair. Tsipras confirmed that they won't look to extend the existing MoU program and committed to reversing key parts of the old agreement (labour, taxes and pension changes were all in the firing line to be reversed).

Specifically Tsipras was reported on Reuters as saying that ‘the bailout failed’ and that ‘the new government is not justified in asking for an extension, because it cannot ask for an extension of mistakes’. Tsipras also said that he believes that a short term ‘bridge agreement’ can be put in place over the next 15 days to keep Greece afloat. Meanwhile, the Greek press Ekathimerini reports the Greek finance minister Varoufakis as saying that should Greece be forced out of the Eurozone then he expects other countries to follow suit leading to a collapse in the Euro. Specifically Varoufakis was quoted as saying that ‘the Euro is fragile, it’s like building a castle of cards, if you take out the Greek card the others will collapse’. With one eye also on the ongoing review of the ELA, the same news agency also reports that the CEO and chairman of the National Bank of Greece plan to step down from their roles over the next few days. The FT meanwhile has reported that the US is ‘pushing eurozone leaders to compromise more with Athens’.

Before this on Friday, the ASE closed 1.97% weaker after the Eurogroup had previously rejected a request from Greece for some sort of short term financing package, instead giving Greece until February 16th to request an extension on the current bailout agreement. Greek equities did in fact finish over 11% stronger last week to leave them around 3% down since the election on January 25th. Greek bonds however tell a different story, with 3y yields nearly 800bps wider since the election. As mentioned Wednesday’s Eurogroup meeting will be a key event given the political standoff. With Tsipras and the Eurogroup both appearing to stand firm it’ll be interesting to see how negotiations and talks advance – if at all – with time running out before the current programme expires at the end of the month. As we’ve mentioned the situation is very fluid so we expect more headlines in the lead up to Wednesday. In the mean time the former Fed Chairman Greenspan believes that a ‘Grexit’ is just a matter of time and was quoted in an interview with the BBC before Tsipras’s speech saying that ‘I believe Greece will eventually leave. I don’t think it helps them or the rest of the eurozone – it is only a matter of time before everyone recognizes that parting is the best strategy’. So all eyes once again on Greece.

Following Tsipras’s speech yesterday, bourses in Asia are generally trading mixed. The Hang-Seng (-0.62%) and Kospi (-0.26%) are weaker although the Nikkei (+0.21%) and Shanghai Composite (+0.12%) are currently trading firmer as we type. S&P 500 futures are trading 0.4% lower. Elsewhere data over the weekend showed China reporting the highest trade surplus on record – although the reading highlighted weak underlying demand. The $60bn surplus came in well above expectations ($48.9bn), supported by both a fall in exports (-3.3% vs. +5.9% expected) and a significant fall in imports during the month (-19.9% vs. -3.2% expected). DB’s China Chief Economist Zhiwei Zhang noted that the weak import data reinforces his view that the fiscal slide has led to a sharp contraction of domestic demand. Zhiwei now believes that there are rising downside risks to his GDP forecast of 7% in 2015 – particularly in the second half of this year given that the policy stance so far has been tight with little signal to change on the fiscal front.

The other main news over the weekend centered on the conflict in the Ukraine where talks are set to continue this morning in Berlin after Germany’s Merkel and France’s Hollande agreed to restart four-way peace talks with Russia and the Ukraine last Friday according to the FT. According to the report, Merkel is due to meet with Obama this morning following calls for the US administration to arm Ukraine given the failed ceasefire agreement initially made in September. Talks will then move onto Wednesday with Merkel looking for a diplomatic solution when she is due to meet Russia’s Putin and Ukrainian President Poroshenko.

Taking a look at markets on Friday, both the S&P 500 and Dow finished -0.34% despite a strong payrolls print in the US and better day for oil markets with both WTI and Brent firming over 2% higher. Treasuries however were weaker with the focus back on the Fed and potential rate ‘liftoff’ as 10y yields closed 14bps higher at 1.957% - the highest yield since January 8th. In terms of payrolls, the 257k reading was well ahead of the 228k expected whilst December’s print was revised significantly to 329k from 252k previously. The three month average of 336k is in fact the fast pace since 1997. Attention will now turn to Yellen’s upcoming semi-annual monetary policy testimony (formerly Humphrey-Hawkins) and then the FOMC statement in March with the latest reading having increased the chances that we see some changes or removal to the ‘patience’ language.

Following the data, the Fed’s Lockhart was quoted on Bloomberg as saying that ‘the economy is on a path to a satisfactory and desirable state of health’ although the Fed official did however say that ‘I’d like to see some evidence that what we believe to be transient factors driving recent weak inflation readings are, in fact, passing’. The Fed’s Plosser meanwhile was quoted on Reuters as saying that the Fed should have dropped the ‘patience’ language last month and ‘it never should have been there in the first place’. In terms of the other macro prints, unemployment ticked up slightly to 5.7% although average hour earnings improved to +2.2% yoy (from +1.9% previously) and the labour force participation rate was more or less in line at 62.9%.

Just wrapping up the market moves on Friday, equities in Europe were largely mixed on Friday although they recovered post the US payrolls print. The Stoxx 600 closed +0.21% firmer having traded as low as -0.4% on the day pre-payrolls. The DAX (-0.54%) and CAC (-0.26%) were weaker although the IBEX (+0.36%) was stronger. The Euro continues to trade with notable volatility, closing 1.4% weaker versus the Dollar at $1.132. The single currency has in fact closed either higher or lower by at least 1% over the last four sessions with Greece dominating the headlines and the US posting solid macro data. Fixed income markets meanwhile were subdued. Crossover finished unchanged and 10y Bunds were 1bp wider at 0.375%. Data largely took a backseat although the industrial production reading for Germany (-0.7% yoy vs. -0.3% expected) came in softer than expected.

Taking a look at this week’s calendar, we kick off this morning in Europe with trade data out of Germany along with the January business sentiment print for France and the investor confidence reading for the Euro-area. It’s the usual post-payrolls lull in the US this afternoon with just the labour market conditions index due. Turning to tomorrow, the China inflation print will be worth keeping an eye on whilst closer to home in Europe we’ve got industrial and manufacturing production prints for France and the UK, along with the industrial production reading for Italy. The ECB’s Praet and Costa speaking in Lisbon could also be worth keeping an eye on. Focus in the US on Tuesday will likely centre around the JOLTS report (although we note the lag in the reading versus recent employment prints) whilst wholesale inventories and sales along with the IBD/TIPP economic optimism survey for February are also due. We will also keep an eye on the Fed’s Lacker speaking on the US economy on Tuesday afternoon. The calendar slows down on Wednesday with no notable releases in Asia or Europe. Over in the US we get the monthly budget statement for January and the Fed’s Fisher due to speak. We kick Thursday off with machine tool orders for Japan whilst the attention in Europe will no doubt be on the final January CPI print for Germany with the market expecting a -0.3% yoy reading. It could also be worth keeping an eye on the Bank of England inflation report on Thursday morning. Industrial production for the Euro-area rounds off the day in Europe. Retail sales – where we expect a weak energy related headline print - jobless claims and business inventories are the highlights in the US on Thursday. It’s a busy end to the week in Europe with the highlight being the Q4 GDP print for the Euro-area and the market expecting a 0.8% yoy print. We’ll also get GDP numbers out of Germany, France and Italy. Away from the growth numbers, we also get trade data for the Euro-area, employment data out of France and construction output for France. We end the week in the US with the import price index and the University of Michigan Consumer Sentiment print.