European Stocks Slide, Greece Tumbles But US BTFDers Emerge After Collapse In Greek Bailout Talks

As extensively reported over the past two days, this weekend's "last chance" Greek negotiations reached a roadblock after talks broke down after just 45 minutes. Creditors deemed the renewed reform proposals from Greece as inadequate as the troubled nation stands firm that they will not budge on pension cuts or VAT increases ahead of the June 18th European finance minister meeting.

Following these events, European equities (Eurostoxx50 1.2%) kicked off the week broadly lower, with the ASE down 7% and notable underperformance seen in the National Bank of Greece (-12% ) and Alpha Bank (-7%). Separately, after opening up by around 60 ticks, Bunds have since given up some of its gains but remain firmly higher (+28 ticks), touching on the 50% retracement level of June sell-off in the process. US equity futures likewise opened lower but have proceeded to levitate marginally higher as the BTFDer brigade refuses to buy that Greece will be kicked out.

Meanwhile the bluffing on all sides continues, with Greece refusing to budge on its red lines, while EU ratcheting up rhetoric even more and now openly saying Greece should prepare for a "state of emergency" if no deal by June 30: The European Commission needs to make plans for a 'state of emergency' in Greece from July 1 if Athens does not reach an agreement with its creditors, Germany's EU Commissioner Guenther Oettinger said on Monday in Berlin.

"We should work out an emergency plan because Greece would fall into a state of emergency," Oettinger, who is also a senior member of Chancellor Angela Merkel's Christian Democrats said, citing the need to ensure access to energy and medicine.

In any eventm, while as usual US stocks are preparing to brush off concerns of a default, so far Europe is a different story and by midmorning, the Stoxx Europe 600 index was trading around 1% lower, weighed down by a 1.2% slide on Germany’s DAX-30. Athens’ main stock exchange fell by just over 5%, led by a steep decline in banking stocks.

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Greek bonds also tumbled Monday, sending the yield on the country’s 2-year debt up to almost 28%, more than 3 percentage points higher on the day and a level last seen in late April. Yields rise as bond prices fall. Peripheral European bonds have also blown out, with Spanish 10Y yields rising above US bonds for the first time since October, and both Spain and Italy were trading in the mid-2.3% range at last check.

As WSJ notes [41], Greek bank stocks were hit particularly hard, with shares in Alpha Bank AE, Eurobank Ergasias SA, National Bank of Greece SA and Piraeus Bank SA all down between 6.5% and 14% by midmorning. Monday’s drop means they have now all declined more than 18% since the start of June. So far in 2015, all are nursing losses of between 35% and 65%. So much for that Bloomberg rumor inspired surge which sent Athens stocks soaring late last week.

The stalemate in Greece continues to drag on, weighing on EUR/USD, however the pair has trimmed its earlier weakness. Yet another failure to reach an agreement pushed the 1-month implied rate to its highest level since Dec’11. Elsewhere, GBP/USD is trading lower following the S&P revising the UK credit outlook to negative from stable while affirming its rating at AAA. The rating agency attributed the move to the planned referendum on EU membership which they say represents a risk to growth prospects for the country's economy.

WTI and Brent crude futures are lower amid a lack of fundamental news with the greenback residing in positive territory amid the risk averse sentiment. Of note, Libya News Agency reported citing an unidentified official at National Oil Corp that Libya’s output has climbed to 500,000bpd, (compared to 460,000bpd reported last week). Meanwhile, risk-off sentiment supported spot gold in early trade following the global selloff in equities however, later entered negative territory after a hitting its 10DMA at 1,180.65. Analysts at Morgan Stanley expect gold prices to remain under pressure amid expectations of higher US interest rates.

Looking ahead, sees a light economic calendar with the highlights coming in the form of the US Empire Manufacturing and Industrial Production reports.

In summary: European shares remain lower, close to intraday lows, with the banks and autos sectors underperforming and food & beverage, retail outperforming. Tsipras hardens Greek stance after collapse of bailout talks. The Italian and Swedish markets are the worst-performing larger bourses, the U.K. the best. The euro is weaker against the dollar. Greek 10yr bond yields rise; Spanish yields increase. Commodities decline, with copper, nickel underperforming and natural gas outperforming. U.S. Empire manufacturing, net TIC flows, NAHB housing market index, industrial production, capacity  utilization due later.

Market Wrap:

• S&P 500 futures down 0.3% to 2077.7
• Stoxx 600 down 1.2% to 384.9
• US 10Yr yield down 3bps to 2.36%
• German 10Yr yield down 1bps to 0.82%
• MSCI Asia Pacific down 0.6% to 147.3
• Gold spot down 0.6% to $1175/oz
• All 19 Stoxx 600 sectors fall; food & beverage, retail outperform, banks, autos underperform; 3% of Stoxx 600 members gain, 96% decline
• Eurostoxx 50 -1.4%, FTSE 100 -0.8%, CAC 40 -1.2%, DAX -1.5%, IBEX -1.4%, FTSEMIB -1.9%, SMI -0.8%
• Asian stocks fall with the Sensex outperforming and the Shanghai Composite underperforming; MSCI Asia Pacific down 0.6% to 147.3
• Nikkei 225 down 0.1%, Hang Seng down 1.5%, Kospi down 0.5%, Shanghai Composite down 2%, ASX down 0.1%, Sensex up 0.6%
• Saks Owner Plots Europe Expansion After $3.2 Billion Kaufhof Buy
• Euro down 0.39% to $1.1222
• Dollar Index up 0.3% to 95.25
• Italian 10Yr yield up 11bps to 2.32%
• Spanish 10Yr yield up 12bps to 2.37%
• French 10Yr yield up 5bps to 1.27%
• S&P GSCI Index down 1% to 433.3
• Brent Futures down 1.7% to $62.8/bbl, WTI Futures down 1.3% to $59.2/bbl
• LME 3m Copper down 1.9% to $5797/MT
• LME 3m Nickel down 1.9% to $12875/MT
• Wheat futures down 1.3% to 504 USd/bu

Bulletin Headline Summary from Bloomberg and RanSquawk

• Greek government official refuted claims that they have discussed a potential default and stated that Greece are hoping to reach a deal by 18th June.
• Greek 2Y yield up over 100 bps, Greek ATG index down 6.3% and Greek Banking Index down 12.8% following Greek talk failure over the weekend.
• Looking ahead, sees a light economic calendar with the highlights coming in the form of the US Empire Manufacturing and Industrial Production reports
• Treasuries gain, 10Y yields 2.361% from YTD high 2.498% reached last week as Greek bailout talks collapse;
• Fed meeting starts tomorrow, with rate decision, updated SEP and Yellen press conference tomorrow.
• Greece and its creditors swapped recriminations over the breakdown of bailout talks, each side hardening its position after attempts to bridge their differences collapsed in acrimony
• PM Tsipras portrayed Greece as the torchbearer of democracy, standing firm against attacks while the caucus leader of Merkel’s parliamentary bloc said Greeks had to “finally reconcile themselves with reality”
• German Finance Minister Wolfgang Schaeuble is ready to accept the consequences of a Greek euro exit and “to write down what has to be written down,” Ifo economic institute President Hans-Werner Sinn says on German ARD public television
• The tumble in German stocks has already breached a level that constitutes a correction and could go another 10% should Greece exit the euro, according to Ralf Zimmermann of Bankhaus Lampe KG and UniCredit Bank AG’s Christian Stocker
• The European Union Court of Justice will deliver a verdict Tuesday on the legality of a plan Draghi announced three years ago, when surging bond yields in stressed economies threatened to split the currency bloc
• 97% of respondents in a Bloomberg survey predicted the ECB won’t take action to stem falling bond prices, after Draghi said this month that investors must get used to more volatility
• Stock forecasters in search of an early-warning system for the next Chinese bear market are zeroing in on the country’s record $358b pile of margin debt
• Sovereign 10Y bond yields mostly lower; peripheral Europe wider led by Greece. Asian, European stocks slide, U.S. equity-index futures fall. Crude oil, copper and gold lower

Event Calendar

• 8:30am: Empire Manufacturing, June 5, est 6 (prior 3.09)
• Industrial Production, May, est. 0.2% (prior -0.3%)
• Capacity Utilization, May, est. 78.3% (prior 78.2%)
• Manufacturing Production, May, est. 0.3% (prior 0.0%)
• 9:00am: ECB’s Draghi speaks in Brussels
• 10:00am: NAHB Housing Mkt Index, June., est. 56 (prior 54)
• 11:30am: U.S. to auction $24b 3M bills, $24b 6M bills
• 4:00pm: Net Long-term TIC Flows, April (prior $17.6b); Total Net TIC Flows, April (prior -$100.9b)

DB's Jim Reid completes the overnight event wrap

Over the weekend the Europeans revived a stalled mission that 7 months ago went sour. Yes space probe Philae miraculously woke up after hiding out on a cliff face on a comet and even tweeted to say it was alive after running out of batteries in November, 500m km from earth. It seems as it approached closer to the sun (205m km now) its batteries started to charge. However as the continent's scientists scored a major victory, their politicians saw another failed attempt to recharge Greek talks yesterday as the latest talks collapsed in an atmosphere as icy as a comet's tail.

Indeed it’s looking set to be another hugely important and potentially pivotal week for markets with the soundtrack for the summer possibly being set. Fed liftoff expectations will once again be sharpened come Wednesday evening when we get the FOMC meeting and statement, as well as Fed Chair Yellen’s post-meeting press conference. In addition, the Greece situation is looking like it’s close to boiling point with Thursday’s Eurogroup set to be the next key event, although the political ping-pong battle of headlines will almost certainly continue in the days leading up. As we'll see in the week ahead there are also quite a few inflation prints out this week which will be important.

Touching on Wednesday evening first of all, our US team expects that the meeting statement should sound a more positive tone relative to that of April’s. It’s likely that we see a downward revision to the Fed‘s forecast for GDP this year and next, but little change to unemployment and inflation. On the important dot plot, our colleagues don’t expect any change to the median Fed forecast for the funds rate for this year (at 0.625% or consistent with two rate hikes before year end), although it’s possible that we see a slight fall in the 2016 median, especially if the Fed modestly trims its 2016 growth estimate. Clearly however, the market is also set to latch onto the language used in Yellen’s press conference and whether or not data so far in Q2 has been sufficient to warrant a move soon.

In terms of Greece, this weekend’s talks have yielded an all too familiar result after yet another breakdown in negotiations between the Greek government and its Creditors. Following the meeting by the Greek delegate and staffers from the European Commission, which after a lengthier discussion on Saturday lasted just 45 minutes yesterday, a spokesman for the EC was quoted as saying that ‘while some progress was made, the talks did not succeed as there remains a significant gap’. The spokesman went on to say that ‘on this basis, further discussion will now have to take place in the Eurogroup’. Deputy PM Dragasakis, part of Greece’s negotiating team, said that there was no response from the institutions for discussions to be held at the necessary level and with the required authorization that would allow a solution to issues that remain open.

DB’s George Saravelos believes that the breakdown in last night’s talks materially reduces the odds that a referendum can be held before a default to the IMF unless some surprising breakthrough is reached today or tomorrow.

He notes that this ultimately leaves PM Tsipras with only two options; agreeing to something that would likely lead to his government collapsing or refusing to agree and capital controls. So attention now turns to Thursday’s Eurogroup at which the IMF’s Lagarde is also expected to be present in the hope that there will be a renewed attempt at an agreement made in the run-up and during the meeting. The ECB non-monetary policy meeting is also scheduled for Wednesday. George believes that a lack of progress on Thursday should see a more formal deadline put on Greece, beyond which capital controls will be implemented. With a deal on the table, it’s looking more and more likely that any decision will be made at the last possible moment. In the meantime and with patience clearly wearing thin amongst various European officials, in an op-ed due to be published today in German newspaper Bild, German Vice Chancellor and Economy Minister Gabriel has been quoted as saying that ‘the shadow of a Greek exit from the euro zone is becoming increasingly perceptible’ and that ‘repeated apparently final attempts to reach a deal are starting to make the whole process look ridiculous, there is an even greater number of people who feel as if the Greek government is giving them the run-around’.

Looking at how markets have responded this morning, the Euro has sold-off around half a percent as we go to print, trading at $1.121 on the back of yesterday’s news. Equity markets in Asia are weaker also with the Shanghai Comp (-1.54%), Nikkei (-0.39%), Hang Seng (-1.36%) and Kospi (-0.49%) in particular all falling. S&P 500 futures are around 0.5% lower meanwhile. There is similar weakness in Asia credit markets this morning where indices are around 1.5bps to 2.5bps wider across the region. Meanwhile in bond markets there’s a noticeable safe haven bid for US Treasuries this morning where the benchmark 10y is 4.9bps lower in yield at 2.343%.

In terms of Friday’s price action, negative sentiment around Greece largely dictated market direction after news on Thursday evening of the IMF leaving talks. Markets were very much in risk-off mode in Europe as we saw the Stoxx 600 (-0.92%), DAX (-1.20%), CAC (-1.41%), FTSE MIB (-1.27%) and IBEX (-1.13%) all sell off. Credit markets weakened also as Crossover finished 13bps wider. Bunds benefited from a safe-haven bid meanwhile as the 10y closed 4.9bps lower in yield at 0.832%, closing more or less at the same level as June 4th after a roundabout week in which we saw yields break briefly through 1%. The Greece concerns weighed on the periphery however as we saw Spain, Italy and Portugal yields rise +11.3bps, +7.0bps and +14.1bps respectively. There was an unsurprising weakening in Greek assets as Greek 2y (+110bps) and 10y (+51bps) yields both took a steep leg higher, while Greek equities were dragged down 5.92% as financials in particular sold off 10.31%.

There was similar weakness in US equities on Friday as we saw the S&P 500 finish the day -0.70%, closing out a relatively flat week for the index (+0.06%). Despite losses being largely broad based, energy stocks (-1.16%) led as WTI (-1.33%) and Brent (-0.86%) fell, not helped by more headlines of record production data out of the EIA concerning Saudi Arabia, Iraq and UAE. It was a reasonably choppy sessions for US Treasuries and despite trading in an 8bps range, the benchmark 10y yield closed just 1.5bps higher in yield at 2.393%. It was a similar story for the Dollar which pared all of the intraday gains to close unchanged at the end of the day.

Friday’s PPI data did little to add to the liftoff debate. Despite a slightly better than expected headline reading for May (+0.5% mom vs. +0.4% expected), the ex food and energy (+0.1% mom as expected) and ex food, energy and trade (-0.1% mom vs. +0.1% expected) prints were a bit more mixed. The preliminary June University of Michigan consumer sentiment reading recovered much of the weakness in May meanwhile, with the print up 3.9pts to 94.6 (vs. 91.2 expected). Despite improvements for both the current conditions (+6.0pts to 106.8) and expectations (+2.6pts to 86.8pts) components, inflation expectations for both 1y and 5-10y buckets were revised down 0.1% to 2.7%.

Elsewhere on Friday, there was some focus on the UK where S&P cut its outlook on the sovereign’s AAA rating to negative from stable as a result of the UK government’s decision to hold a referendum on EU membership by 2017. Meanwhile, Germany’s Merkel provided some support to the low rate environment in Europe saying that as a result the weaker Euro has helped reform efforts in the likes of Spain and Portugal.

Onto this week’s calendar now, we kick off this morning in Europe with the Euro area trade balance for April, while Italian CPI data is also due this morning. The ECB’s Draghi speaking in Brussels is likely to attract the bulk of the attention however. It’s a reasonably busy calendar in the US this afternoon where we are due to get empire manufacturing, manufacturing production, industrial production, capacity utilization and finally the NAHB housing market index. It’s set to be a busy morning in the European timezone on Tuesday where we are due to get German CPI and ZEW survey reading, Euro area employment data and finally the UK CPI/RPI/PPI prints. We’ve got more key releases due in the US on Tuesday where we get housing starts and building permits data for May. Wednesday starts in Japan with trade data expected in the early morning. The focus in Europe on Wednesday will be on the final May CPI print for the Euro area, while UK employment data is also due up as well as the release of the BoE minutes. The bulk of the attention will of course be in the US on Wednesday where we’ve got the FOMC meeting and associated Yellen press conference. It’s a quiet start in Europe on Thursday with just UK retail sales data for May and the ECB economic bulletin due. In the US however we’ve got another first tier release with the crucial CPI reading for May. We’ll also get initial jobless claims, average weekly earnings, Philadelphia Fed business outlook and the leading index on Thursday. We finish the week on Friday in Japan with the Conference Board leading indicator as well as the BoJ meeting. PPI data out of Germany will be a focus, as will UK public finance data in the European timezone. There are no releases due in the US on Friday. The Fed’s Mester will be due to speak however.