Initial "Greek Euphoria" Ends As Market Digests Road Ahead For Europe

If you thought the Greek tragicomedy is over, you ain't seen nothing yet, because despite the so-called Friday agreement, the immediate next step is for Greece to submit its list of reform measures to the Troika, which will almost certainly result in an immediate revulsion in Germany's finance ministry, and lead to another protracted back and forth between the Troika and Greece, which may once again well end with a Grexit, especially if the Greek liquidity situation, where bash is bleeding from both the banks and the state at a record pace, remains unhalted.

Assuming the proposed reform package is agreed upon in short notice (it won't be), the next step would include detailed negotiations around the fiscal targets for this and next year and the required structural reforms to be undertaken. The Eurogroup has set an end-April deadline for this to be achieved, to be followed by the final step which is for it to be ratified by the Greek parliament - not a straight forward task given the outcome from Friday. Only when passed will funding be released. While this is being worked on there are concerns about how the Greece government and the banks will fund themselves over the next two months. There may have to be flexibility on t-bill issuance and ECB funding, or an accelerated agreement.

Whatever happens the pressure should remain on the Greek government, a government which as explained before is already facing an internal fissure as some of the most prominent Syriza members have very openly spoken up against the "negotiation."

It is therefore not surprising that the ongoing decline in the EURUSD since the inking of the agreement, and the fact that the pair briefly dipped below 1.13 this morning - over 100 pips below the euphoric rip on Friday - is a clear indication that the market is starting to realize that absolutely nothing is either fixed, or set in stone. Furthermore, renewed strength in the USD this morning means that commodities are getting mauled once again, with gold earlier trading well under $1200, and WTI sliding into the mid-$49 range, and a retest of $48, and lower, may be iminent.

Still, while FX is starting to fade into a pessimistic view, European indices were buoyed early on by optimism surrounding a loan deal between Greece and Europe after reports late on Friday that an agreement had been made with the Eurogroup to extend financing for a further four months, although dependent on a series of measures to be proposed by Greece today. Despite the FTSE 100 opening above its record high closing price the index has ticked lower since the open, led by the FTSE 100’s second largest member HSBC (HSBA LN) as shares saw selling pressure in the wake of weaker pretax numbers in their earnings report.

Peripheral spreads are tighter across the board with Greece bonds supported by the prospect of a final agreement today with the Eurogroup despite the Greece stock market being closed today, and this is particularly evident in the short-end with the yield on the 3y down 248bps. Portuguese, Italian and Spanish yields have also fallen once again today as optimism spreads to other member states. Looking ahead focus will be on whether the measures put forward by the Greek government are accepted as adequate, particularly by Germany, and tier 1 US data later data with Existing Home Sales due at 1500GMT/0900CST.

Asian equity markets mostly rose with the exception of the Hang Seng (+0%) following the Lunar New Year. Sentiment was bolstered by Friday’s confirmation of an accord between Greece and the Eurogroup, which saw the DJIA and S&P 500 post record highs. Consequently, the Nikkei 225 (+0.7%) outperformed after building on its 15-yr highs while the ASX 200 (+0.5%) also finished in the green, after shrugging off a batch of poor earnings. JGBs rose 13 ticks with outperformance observed in the belly of the curve, after the BoJ bought JPY 400bln worth of debt with maturities ranging from 5-10yrs.

Weakness in UK financials filtered through into Europe alongside a weaker EUR with real money account said to be selling in the EUR/USD pair and as the USD gained ground in morning trade. Weakness in EUR was also further exacerbated by a lacklustre German IFO report with the Business Climate component coming in at 106.8 vs. Exp. 107.7. In terms of option expiries there is around USD 1bln in option expiries at 1.1320 due to roll-off at the 10am NY cut. Commodity linked currencies have been of particular focus this morning with CAD, RUB, and AUD all seeing weakness in-line with a downward trend in crude futures, as gold trades at a 7 week low and RUB weighed upon after Russia’s sovereign downgrade to junk by Moody's late on Friday. On a technical note AUD/USD briefly broker Friday's low and USD/CAD back above Friday's high at 1.2565.

WTI and Brent crude futures trade in negative territory despite opening higher overnight following a bounce-back in the USD and news that Libya’s Zueitina port has now resumed exports after being out of action for almost a year, according to officials. However, heading into the North American crossover, it has been reported that adverse weather conditions has halted export. Elsewhere, it was reported that workers at the Motiva Port Arthur Refinery (largest in the US with a capacity of 600,250bpd) provided notice that they will begin a strike from 0600GMT/0000CST Saturday morning, according to sources. In precious metals markets, despite staging a modest recovery overnight, the broadly stronger USD has continued to hamper prices, while copper traded relatively range-bound overnight with price action subdues as China, the world’s largest consumer of the red metal, remained closed for Lunar New Year holidays.


Bulletin Headline Summary from RanSquawk and Bloomberg

  • European equities trade in the green in the wake of Friday’s Greek/Eurogroup agreement, while the FTSE 100 trades lower following weak earnings from HSBC
  • USD has gained throughout the session in a pullback of Friday’s losses, with downside in EUR/USD exacerbated by real money account selling EUR and weak German IFO
  • Looking ahead, today sees the release of US Existing Home Sales at 1500GMT
  • Treasuries decline as market prepares for 2Y fixed/FRN/5Y/7Y note sales; Janet Yellen’s Humphrey-Hawkins testimony begins tomorrow amid demands for greater transparency and accountability from Fed.
  • Greek PM Tsipras walks another high wire over the next 24 hours as he tries to come up with financial measures that satisfy both the demands of euro-region creditors and his anti-austerity party; has until end of Monday to complete a list of policies in return for the continued funding
  • Spain took the toughest line with Greek Finance Minister Varoufakis as the bloc forced him to adhere to the terms of the country’s existing bailout, according to people with direct knowledge of the talks who asked not to be named because the conversations were private
  • Pro-Russia rebels attacked Ukrainian positions with  artillery, mortars and automatic weapons, the Defense Ministry in Kiev said, as a bomb killed two people at a pro-Ukraine rally in the eastern city of Kharkiv
  • Bill Gross’s $1.46b Janus Global Unconstrained Bond Fund trailed its benchmark in 4Q primarily because it had plowed about 5% of net assets into debt issued by U.S., Russian and Brazilian energy companies
  • Obama is picking a fight with Wall Street over the handling of Americans’ $11t of retirement savings, accusing brokers of skimming significant sums annually from small investors and urging new protections against biased financial advice
  • Denmark’s government rejected a report it could consider imposing capital controls as policy makers and economists try to explain the mechanisms through which the nation’s currency regime operates
  • Sovereign 10Y yields mostly higher. Asian, European stocks higher; U.S. equity-index futures fall. Crude falls, WTI trades below $50/bbl; gold and copper lower

US Event Calendar

  • 8:30am: Chicago Fed Nat Activity Index, Jan., est. 0.05 (prior -0.05)
  • 10:00am: Existing Home Sales, Jan., est. 4.95m (prior 5.04m); Existing Home Sales m/m, Jan., est. -1.8% (prior 2.4%)
  • 10:30am: Dallas Fed Mfg Activity, Feb., est. -4.0 (prior -4.4)

* * *

DB's Jim Reid concludes the overnight event summary

By tomorrow night will we be leaving Greece behind for a while and fully focusing on Mrs Yellen's important semi-annual testimony? Well to a degree yes but there is a lot of unfinished business with regards to Greece even if Friday's agreement provides the first step towards the can being ushered a little further along the ever winding road. It seems Greece were largely forced to back down in their pursuit of a more favourable deal as their banking system could have collapsed any day without an agreement and there was no obvious domestic contingency plan for a Greek exit or a huge electoral desire for it.

However as DB's George Saravelos suggested in a note over the weekend "the road ahead remains long, and it remains unclear how the current government can navigate between the commitments it has made to Europe with competing domestic political demands – both internally within the SYRIZA party as well as with the electorate. A small step has materialized, but the hard work is about to begin". Summarising briefly the next steps, today Greece will have to submit a list of "reform measures" it plans to undertake. Assuming this gets agreed the next step would include detailed negotiations around the fiscal targets for this and next year and the required structural reforms to be undertaken. The Eurogroup has set an end-April deadline for this to be achieved, to be followed by the final step which is for it to be ratified by the Greek parliament - not a straight forward task given the outcome from Friday. Only when passed will funding be released. While this is being worked on there are concerns about how the Greece government and the banks will fund themselves over the next two months. There may have to be flexibility on t-bill issuance and ECB funding, or an accelerated agreement. Whatever happens the pressure should remain on the Greek government.

Overnight DB has also published its latest House View which includes a special report looking at Greece in more detail. The report notes that a request for a bailout extension was the first step in what is likely to be a difficult path to compromise and breaks down the various approval steps and negotiation processes that are now upcoming. The piece also touches on why a Greek exit is a negative outcome for both parties and provides some details around how Europe is better prepared than in the past and why contagion risk is lower.

Before we move on, it’s interesting to see reports over the weekend suggesting that we may already be seeing the first signs of tension within SYRIZA following Friday’s agreement. Reuters has reported that a veteran member of the party has accused the government of creating an ‘illusion’ to voters before going on to apologise to Greek people himself for participating. As mentioned there is still a lot of work ahead and tensions domestically in Greece will be one of the many issues facing the current Tsipras’s government.

Refreshing our screens quickly this morning, bourses are largely trading firmer. The Nikkei (+0.52%) has extended recent gains and the Kospi (+0.29%) and ASX (+0.45%) are both higher. The Hang-Seng (-0.05%) is relatively subdued meanwhile. The Euro is largely unchanged.

In terms of the market reaction on Friday, with the announcement coming after the European close the impact was most felt in the US where the S&P 500 in particular bounced off intraday lows of as much as -0.6% to finish +0.61% at the close. The new level marked a fresh record high. Elsewhere, credit markets closed firmer with CDX IG nearly 1bp tighter whilst the Euro bounced off intraday low of $1.128 to finish at $1.138, +0.11% on the day and +2.2% off the pre-announcement lows. US Treasuries weakened into the close meanwhile to pare back earlier gains with the 10y finishing unchanged at 2.112%. Oil markets took a backseat as Brent finished unchanged and WTI fell -1.97%. The latest Baker Hughes rig count meanwhile showed the number of operating rigs falling by 37 last week – although this was the smallest drop in seven weeks.

It was a quiet day data wise in the US with just the preliminary February manufacturing PMI which came in above consensus (54.3 vs. 53.6 expected). This week however we’ve got a fairly busy calendar. We’ll run through the details at the end of the report however away from Greece, Fed Chair Yellen’s semi-annual monetary policy testimony before the Senate Banking Committee tomorrow night and the House Financial Services Committee on Wednesday night will no doubt attract much attention. Our US colleagues expect the testimony to, in large part, reflect the recent FOMC minutes however the latest payrolls print could mean we see a more upbeat view of the US economy. Will Yellen make a case to congress that time is approaching for the Fed to begin the process of policy normalization? When Yellen is about to speak we tend to have a bias towards thinking she'll be fairly dovish and with inflation where it is globally at the moment this is likely to hold back any negative shock tomorrow night.

Indeed central banks continue to be the main driver of our view for 2015 and we're continuing to see the impact on credit which supports our bullish view in Europe, especially for the weaker end of HY. Indeed the latest fund flow data is impressive. Having seen almost exclusively weekly outflows in the second half of 2014 European HY funds have seen a notable turnaround at the start of this year. Despite a slow start to the year as the first week of January saw further marginal outflows we have now had 6 consecutive weeks of inflows, totaling $2.6bn on a cumulative basis. This has included the two strongest weeks (in notional terms) ever within the data set going back to 2004. To put this number in context in the second half of 2014, a period when we saw just 6 weeks of inflows, total net cumulative outflows were $4.3bn. So the flows seen so far this year seem impressive in light of how negative the second half of 2014 was. In notional terms flows in the first 7 weeks of this year are also ahead of the $2.1bn of inflows seen during the same period in 2014 and comfortably ahead of the $1.2bn seen at the start of 2013. It’s also worth noting that the 4-week moving average is also at a record level ($541mn) in notional terms. That said given the strong growth in the size of European HY market in recent years on the back of record issuance levels the inflows as a percentage of NAV aren’t quite as impressive. Although that’s not to say they aren’t still fairly strong. YTD we have seen +5.4% which is not as strong as either 2014 (+6.6%) or 2013 (+7.5%). The outflows seen in the second half of 2014 accounted for around 10.4% of NAV. The trend in US HY fund flows is broadly similar with the 4-week moving average also at record level from a notional perspective while even as a percentage of NAV the current level is at a near 3 year high. That said something else worth considering is the strength in issuance this year. YTD European currency (EUR and GBP) non-financial HY supply (based on our calculations) is around €4bn ahead of each of the two previous years which both ended up being record years. Issuance is often a sign of market strength and demand so its difficult to be too worried on this but its worth being aware of.

Rounding off markets on Friday, equity markets in Europe traded in a fairly volatile fashion for most of the day before closing a touch firmer ahead of the conclusion of the Eurogroup. The Stoxx 600 (+0.23%) and DAX (+0.44%) finished higher whilst yields in the periphery ended 3-5bps tighter. Greek equities finished -0.27%. As well as the obvious attention on Greece, data flow on Friday attracted some interest with the release of PMI indicators for the region. In terms of the overall Euro-area print, the composite reading (53.5 vs. 53.0 expected) ticked up +0.9pts supported by a higher services (53.9 vs. 53.0 expected) reading. The manufacturing print (51.1 vs. 51.5 expected) meanwhile increased a tenth of a point but came in below expectations. Regionally, the services reading improved in both France (53.4 vs. 49.9 expected) and Germany (55.5 vs. 54.4 expected) although manufacturing prints for the former (47.7 vs. 49.6 expected) and latter (50.9 vs. 51.5 expected) disappointed.

Before we take a look at this week’s calendar, on Friday Moody’s downgraded Russia one notch to Ba1 and kept them on negative outlook. The current crisis in Ukraine, capital outflows and rising risks of political shocks impacting debt service payments all appeared to play a part. In terms of the latest on the Ukraine crisis, the FT reported over the weekend that Ukrainian troops and Russian-backed separatist exchanged prisoners and began to pull away heavy weapons from the front line in certain regions. However reports of explosions at a pro-Ukraine rally on Sunday continue to test the agreements put in place.

Taking a look at this week’s calendar, it’s a quiet start in Europe with just the February German IFO survey due whilst the ECB’s Mersch is also due to speak. In the US however this afternoon we’ve got the Chicago Fed national activity index, along with existing home sales and the Dallas Fed manufacturing activity print for February. Turning to Tuesday, the only notable release in the Asia timezone is small business confidence out of Japan. It’s a busier day in Europe tomorrow however. The final Q4 GDP report is due out of Germany along with the various trade data prints for the region. As well as this we’ve got the January inflation readings due out of the Euro-area with the market expecting a -0.6% yoy headline reading and +0.6% yoy core print. Focus on Tuesday in the US however will likely be on the aforementioned Yellen’s semi-annual testimony speech (formerly Humphrey-Hawkins). Elsewhere in the US tomorrow will also see the S&P/Case-Shiller index, consumer confidence and also the Richmond Fed manufacturing print. We start Wednesday in China with the preliminary February manufacturing PMI print whilst in Europe we’ve just got French consumer confidence due. In the US on Wednesday we have the conclusion of the semi-annual monetary policy meeting as well new home sales data due. Thursday starts with consumer confidence and unemployment data in Germany, along with money supply data for the Euro-area. Later in the morning we also get GDP data in the UK along with confidence indicators for the Euro-area. Over in the US the main focus for the market will most likely be on the inflation print for the region with the market looking for a +1.6% yoy core print. As well as this, durable goods orders, capital goods order, initial jobless claims, Kansas City Fed manufacturing index and FHFA house price index are due – so plenty to keep an eye one. We round out the week in Japan with housing starts data whilst in Europe preliminary February inflation data for Germany will be of focus. The ECB’s Constancio is also due to speak. In the US we close out a busy week with the Q4 GDP reading as well as pending home sales and the University of Michigan index.