Another Hope-Driven Levitation Offsets Reality Of Greek Indecision Snafu

After tumbling to lows of 1.2735, and dragging the entire 100% correlated risk complex down with it, the EUR has since seen a straight line push higher despite the sad reality that for all expectations, Europe was embarrassingly simply unable to come to a resolution over Greece and has kicked the can to November 26, leaving Greece with zero cash to fund obligations to European banks, and if anything is left over, to fund domestic operations. The reason for the move up? The market, in all its wisdom, hopes  that 6 short hours after saying "9", Merkel has already softened her stance and that a deal in 5 days is inevitable. For that to happen, some form of OSI haircut (official sector impairment) would have to be part of the deal, something Germany has been furiously against from the beginning.  Of course, these are the same people who said a deal last night was inevitable. These are the same people who also said that Washington is this close from a reconciliation on the Fiscal cliff, despite this thing called reality (see Rough start for fiscal cliff talks from Politico). Adding to the surrealism was a French spokesman who said the country would "do everything to reach a Greek accord." Since a recently downgraded France will "do" nothing (that's Germany), but will "say" everything, it is safe to say that France is now the comic relief typically attributed to Jean-Claude Jun(c)ker.

Finally, and wrapping up the bizarro surreality of central planned markets, the recent spike in Brent on Gaza re-escalations has been interpreted by those uber-complex DE Shaw algorithms as a risk on move, and pushed all risk indicators to overnight highs. With volume today set to be abysmal as trading desks will be empty around noon, expect some more absolutely insane zero volume moves in the SkyNet battleground formerly known as the "market."

The key events in a pre-holiday subdued session via SocGen:

The markets should continue to move on the Eurogroup announcement today, especially as economic newsflow will be light. EU finmins broke up with no agreement and though progress is reportedly to have been made on a debt reduction package for Greece, we now have our hopes pinned on a breakthrough at the next meeting on November 26th.


In the UK, investors will be paying close attention to the BoE minutes, and particularly the breakdown of the November meeting vote. A narrow vote would underpin, and perhaps even exacerbate, the debate on whether or not further QE will be pursued by the BoE in 2013: a risk factor for the GBP.


In the US, initial claims will be the main indicator to watch. A drop would confirm that last week's upturn was just a blip in the downward trend over the last month. Nevertheless, the impact on the Bond and FX markets could be limited as US investors prepare for the Thanksgiving break tomorrow. Moreover, the fiscal cliff remains the key topic for the US short term.


Overall, market sentiment likely will remain unstable and mixed towards the end of this week: an official and durable (if this term can truly be used) solution for Greece as well as reassuring information regarding the US fiscal cliff will be needed for investors to view the year end serenely.

Concluding with Jim Reid's recap:

An agreement to shore up Greece’s funding gap and debt sustainability remains elusive after Tuesday’s 11-hour Eurogroup meeting concluded without a consensus course of action. It also means that Greece will need to wait a little while longer until at least the next Eurogroup meeting (26th Nov) before it knows whether the troika will release the next bailout tranche (and the conditions attached). Ahead of the EU5bn T-note redemption last week we heard PM Samaras say that without the new bailout tranche Greece will run out of money "within days". The next debt redemption dates for Greece are 14th and 21st of December where EUR5.4bn and EUR1.6bn of T-notes are due.

Although we're yet to have a deal, EU's Junker said after the meeting that Greece has made “considerable progress” and that there are “credible options” to improve Greece’s debt position. Nevertheless, the lack of a definitive outcome saw the EURUSD sell off 30 ticks and is currently hovering around a 2 day low of 1.275 as we type. In terms of the “credible options”, a 15-page document prepared for the Eurogroup meeting suggested that relief measures currently on the table include EUR10bn of debt buybacks, reduction of interest on bilateral loans by between 25-70bp and interest deferrals on EFSF loans of up to 10yrs (Reuters).

Importantly however, the document suggests that Greece’s debt cannot be cut to 120% of GDP by 2020 (the level deemed sustainable by the IMF) without haircuts on Greek loans held by the official sector. We suspect whether Greece needs additional debt haircut was probably one of the key sticking point in the negotiations.

Overnight markets generally lost one-third to half a percent immediately following the Eurogroup headlines, but have retraced some of the losses. The Hang Seng (+0.33%), Nikkei (+0.7%) are trading higher on the day. The Shanghai Composite dipped below the symbolic and closely monitored 2000 mark and is now hovering at its lowest level since January 2009. Other risk assets including the AUD (-0.3%) and copper (-0.65%) are trading in the red. The USDJPY (+0.29%) is testing the 82 level overnight, a level last seen in early April. This comes after the release of disappointing Japanese trade data which showed exports down 6.5% yoy in October (vs -4.9% yoy expected). In the credit space, the Asian (-3bp) and Australian IG (-2bp) indices nudged wider post the Eurogroup headlines but are still trading tighter on the day.

Briefly recapping yesterday’s US move, the rebound in risk assets extended for a third consecutive day although US equities wobbled in the second half of the session as Bernanke warned that the Fed alone cannot fully offset the harm from going over the ‘fiscal cliff’. Bernanke also gave little away as to the Fed’s intentions at its December meeting. The S&P500 recovered into the close however, finishing with a marginal 0.07% gain as markets came to the realisation that there was nothing particularly ground-breaking in the speech.

Sector performance wise, technology stocks (-0.72%) weighed on the overall index after Hewlett-Packard announced an $8bn impairment on an investment in a British software maker. The matter is being referred to regulators for accounting irregularities which drove HP shares down 12% on the day.

Back to Bernanke’s speech yesterday he did note that the decline in US unemployment postcrisis, despite anaemic growth, suggests that the potential growth rate must be lower than the pre-crisis level of 2.5%. That being said, the “consensus amongst  (Bernanke’s) colleagues on the FOMC” was that “the unemployment rate is still well above its longer-run sustainable level, perhaps by 2 to 2.5% percentage points or so”. That line perhaps gave some comfort to markets that the Fed will not depart significantly from its current stance and helped explain some of the late-day rally in equities.

In other headlines, US Secretary of State Hillary Clinton arrived in Israel to help mediate talks between Israel and Hamas and called on both parties to “de-escalate” their week-long conflict. Egyptian officials were reported to be hopeful of a ceasefire deal on Tuesday night (although Israeli officials denied they were close to a truce). Brent crude is broadly unchanged overnight after losing 1.7% on Tuesday.

Turning to the day ahead, the focus will probably be on further comments from European leaders following the marathon Eurogroup meeting overnight. In reality it will likely be a quiet day ahead of Thanksgiving holiday tomorrow in the US. Data wise we have the US flash manufacturing PMI and jobless claims released today as well as the BOE’s minutes from the other side of the pond.