Markets Twist And Turn On Every Headline In The Endless Greek Tragedy

For a sense of what is driving sentiment this morning look no further than the Athens stock market which exploded higher yesterday on a Bloomberg story based on "two sources" that Germany was willing to compromise, only to close just as the IMF pulled a classic bad cop and announced it was halting work on Greece, and before further news from Bild that Germany was preparing for a Greek default while Europe had given Greece 24 hours to submit a final, workable proposal. As a result, it tumbled promptly at the open even as optimism persists and since the opening plunge, Greek stocks have continued to climb and are now back to yesterday's euphoric opening levels.

Then there was Diesel-BOOM, who had the usual batch of headlines of which this one was key:

  • GREECE REJECTING PROPOSALS `NOT AN OPTION': DIJSSELBLOEM

Which is ironic because Greece can say the same for the Troika's reaction ot its own proposal.

Germany's economy minister was also in the spotlight:

  • GREECE EURO EXIT WOULD BE ‘CATASTROPHE’: GERMANY’S GABRIEL

But not before Merkel hit the tape saying that:

  • STRONG EURO MAKES IT HARDER FOR SPAIN, PORTUGAL, IRELAND: MERKEL

Which in turn sent the Euro tumbling, but only for another comment to send it surging:

  • IMF HASN’T BROKEN OFF GREECE TALKS, JAEGER SAYS

Needless to say, the algos have had a field day with the kneejerk reactions to all of the above.

One thing is certain: by the end of trading stocks will be anywhere but here, following the daily barrage of optimistic rumors offset by subsequent official rejections. Also, the Greek clock has practically run out, so the time to come up with a credible conclusion to the world's longest running soap opera is here. Imagine what would happen if the decision whether to let Lehman default took five years...

Aside from Greek stocks, in what has otherwise been a relatively quiet start to the session, European equities have ebbed lower in a continuation of the move seen in the wake of the downbeat IMF comments from Greece during market yesterday. These comments have also been followed by reports overnight that the German government is said to be planning for a potential Greek state bankruptcy with discussions on capital controls and debt haircuts. Nonetheless, markets still await further updates for Greece as, technical level talks between EU officials and the Greek government have recommenced. In terms of sector-wide moves in Europe, selling has been relatively broad-based with stock specific newsflow particularly light. From a fixed income perspective, Bunds trade relatively unchanged while the Greek spread is wider to the German  benchmark by around 18bps amid the downbeat reports for Greece.

Asian equities traded mixed despite a positive Wall Street amid light news flow and a scarce economic calendar. Both the Hang Seng (+1.4%) and Shanghai Comp. (+0.9%) rose, the latter yet again hitting fresh 7-year highs, underpinned by further easing calls after yesterday’s tepid Chinese data. The ASX 200 (-0.2%) fell following yesterday’s slump in commodities while the Nikkei 225 (+0.12%) finished the session with modest gains.

Given the sentiment across Europe, EUR is weaker this morning with the currency also dealt a blow by comments from German Chancellor Merkel who said the EUR is problematic for reform efforts in the periphery. These comments weighed on EUR given the rarity of the German Chancellor speaking directly about the EUR level, with the move to the downside in EUR/USD exacerbated by the pair tripping stops through yesterday’s lows at 1.1183. Elsewhere, commodity currencies including CAD, NZD and AUD have been weighed on by lower oil prices as WTI and Brent crude futures with NZD looking to equal its worst weekly performance on record.

Price action in the commodity complex has largely been swayed by the EUR-inspired stronger USD with commodity newsflow otherwise light and as such, WTI and Brent crude futures have resumed the downtrend seen during yesterday’s session. In metals markets, spot gold and silver trade modestly lower while copper remained near 7-week lows overnight and is on course for a 4th consecutive weekly loss amid fears that demand for the red metal is down in China, while Dalian iron ore futures saw a mild pullback overnight.

 

Bulletin headline summary from Bloomberg and RanSquawk

  • The Greece saga continues with reports for the troubled nation continuing to paint a dreary state of affairs
  • EUR was dealt a further blow by comments from German Chancellor Merkel who warned of a strong EUR with newsflow otherwise relatively light
  • Looking ahead, today sees the release of US PPI and Univ. of Michigan
  • Treasuries head for weekly gain after yesterday’s rally (10Y yield -10.7bps), strong 3Y/10Y/30Y auctions; focus shifts to next week’s Fed meeting with updated “dot plot” and Yellen presser due Wednesday.
  • Greece was given less than 24 hours to come up with firm proposals to end an impasse with creditors, two officials present said
  • Policy makers are now examining all scenarios if Greece refuses to compromise, including the possibility that the country could eventually leave the currency, said the officials
  • German government is preparing for a Greek default after Tsipras again didn’t concede any ground on EU proposals, Bild reports, citing unidentified people familiar with the talks; growing number of Merkel’s CDU object to further financial aid for Greece
  • China could cut banks’ reserve-requirement ratios as early as this weekend to spur economic growth and boost cash supply to counter a surge in municipal bond sales
  • Mario Draghi denied that a closed-door speech by a ECB official that sent bond yields tumbling revealed a change in policy, while pledging new measures to improve transparency
  • Merkel said in a speech that a too-strong euro makes it harder for countries “especially Spain and Portugal” to reap rewards from economic reforms in terms of exports
  • The jump in Swedish house prices revealed in a Friday report is grounds for concern and policy makers are looking for ways to deal with the development, Finance Minister Magdalena Andersson said
  • The conviction of China’s former security chief in a secret one-day trial laid bare the limits of President Xi Jinping’s campaign against corruption and undercut his pledge to enforce the rule of law
  • Sovereign 10Y bond yields mostly higher. Asian stocks gain, European stocks, U.S. equity-index futures higher. Crude oil, copper and gold lower

US Event Summary

  • 8:30am: PPI Final Demand m/m, May, est. 0.4% (prior -0.4%)
    • PPI Ex Food and Energy m/m, May, est. 0.1% (prior -0.2%)
    • PPI Ex Food, Energy, Trade m/m, May, est. 0.1% (prior 0.1%)
    • PPI Final Demand y/y, May, est. -1.1% (prior -1.3%)
    • PPI Ex Food and Energy y/y, May, EST. 0.7% (prior 0.8%)
    • PPI Ex Food, Energy, Trade y/y, May, est. 0.9% (prior 0.7%)
  • 10:00am: U. of Mich. Sentiment, June preliminary, 91.2 (prior 90.7)
    • Current Conditions, June (prior 100.8)
    • Expectations, June (prior 84.2)

 

DB's Jim reid completes the overnight summary

In terms of the data, headline retail sales advanced +1.2% mom for the month of May and in line with market expectations while there was a cumulative +0.6% of revisions to the prior two months. The important retail control element however (which is a key input into goods spending for GDP) was up +0.7% mom and ahead of expectations of +0.5%, as well as upward revisions for April and March of +0.1% and +0.4% respectively. Our colleagues in the US note that following this print, the level of retail control is up approximately +5.0% annualized from its Q1 average, which marks the fastest pace of growth since Q2 last year. As well as the obvious positive read-through to growth this quarter following yesterday’s data, our colleagues expect that yesterday’s revisions to the prior months should result in Q1 real GDP being revised up to 0.0% when the final reading is released in 12 days time. Other data was also stronger in the US yesterday. The import price index for May (+1.3% mom vs. +0.8% expected) was a notable beat, while business inventories for April (+0.4% mom vs. +0.2% expected) also surprised to the upside. Initial jobless claims meanwhile rose 2k to 279k (in-line with the four week average), but stayed below 300k for the 14th consecutive week.

Yesterday’s improvement in retail sales saw the Atlanta Fed upgrade their GDPNow Model to 1.9% for Q2, from 1.1% at the previous estimation after citing the improvement to real consumer spending growth. The model continues to paint a less optimistic picture than the street however, with the median estimates generally hovering between 2.5%-3.0%. Price action in rates yesterday was fairly confusing to say the least. Despite a +0.42% rise for the Dollar index (although paring gains of as much as +1.0%) 10y Treasury yields actually rallied on the day and eventually closed 10.7bps tighter at 2.378%. Prior to the data, yields hovered dangerously close to 2.5% intraday, reaching a high of 2.499%. The level appeared to attract some buyers however as yields trended steadily lower from around midday, and quickly reversed a sharp spike upwards following the data. As well as the perhaps sensitive 2.5% level, a safe-haven bid on the back of concerns on headlines around the IMF withdrawing from Greece negotiations (more later) and a bull flattening of the yield curve following a strong 30y auction have all been cited as possible explanations for yesterday’s moves in Treasuries. Indeed, just on this, 30y Treasuries closed 12bps tighter yesterday at 3.096%, helped by a strong 30-year auction later in the day which saw the bid-to-cover ratio of 2.54 (bouncing from 2.20 in May) the highest since December last year. Equities enjoyed a modestly better day yesterday as the S&P 500 finished +0.17%, paring initial gains of some +0.5% pre-IMF headlines. The commodity complex closed softer yesterday. Gold finished -0.34% while in oil WTI (-1.07%) and Brent (-0.90%) gave up some of this week’s gains.

The Greek saga took another important twist yesterday when the IMF decided to withdraw its team from negotiations in Brussels, with a spokesman for the Fund saying that ‘there are major differences between us in more key areas’ and that ‘there has been no progress in narrowing these differences recently’. The news has put a clear dent in what was the now false optimism that appeared to be building in the previous few days. Instead, the move highlights that 1) both Greece and its Creditors still appear to be no closer to aligning views and 2) that the relationship between both is seemingly on a knife edge. On top of this, tensions in Athens and specifically in Greek parliament continue to add to melting pot of issues, with PM Tsipras regularly coming under fire for more and more criticism. The time pressure has been well documented with the bundling of IMF payments due at the end of the month as well as the need for a Staff Level Agreement to be agreed and passed through Greek parliament before any funds can be released. For now, with talks more or less halted the ball appears to be firmly in Greece’s court and it seems that we are more or less at the stage where it is now time for Government to decide one way or another. A spokesman for the IMF suggested that ‘we remain engaged’ and that the IMF doesn’t leave the table, but it’s hard to see the Fund re-engaging unless some material progress is made by Greece. European Council President Tusk has emphasized the need for things to now accelerate, while also warning that ‘there is no more space for gambling’. Tusk also highlighted that the next Eurogroup on the 18th June should be decisive, suggestive perhaps of a soft deadline. So we look likely to move on for another week, but perhaps with the pressure greater than ever on PM Tsipras and his government.

Greek equities actually closed up +8.16% yesterday, although it’s worth noting that the market closed before the IMF headlines came out. The headlines did however cause a dent to other European equity markets however. Having traded as high as +1.2% intraday, the Stoxx 600 eventually finished +0.57% while the DAX (+0.60%), CAC (+0.74%), IBEX (+0.53%) and FTSE MIB (+0.35%) all saw similar moves down into the close. Yesterday’s move lower in Treasury yields was mirrored in Europe yesterday as 10y Bunds (-9.7bps) bounced off their recent highs in yield to finish at 0.881%. Peripherals meanwhile, finished 8-11bps lower. European data flow was contained to just France yesterday where we saw CPI (+0.2% mom) print in line with consensus.

Before we take a look at today’s calendar, looking across the Asia region this morning equity markets are generally flat to slightly up for the most part. In China the Shanghai Comp (+0.44%) and Shenzen (+1.00%) are both higher, supported perhaps by Bloomberg commentary that the PBOC may look to ease again as soon as this weekend. Elsewhere there are also gains for the Hang Seng (+0.66%) while the Nikkei (-0.04%) is more or less unchanged. Bond markets in the region have generally followed the lead from Europe and the US yesterday, with 10y Japan (-3.5bps), Australia (-14.8bps) and Singapore (-4.7bps) yields in particular falling, while 10y Treasuries have dropped a further 1.6bps in yield and currently sit at 2.361%.

After we went to print yesterday, we saw the usual monthly data dump in China. The readings for May were fairly disappointing for most part with very little growth in retail sales (+10.1% yoy from +10.0% previously) and industrial production (+6.1% yoy from +5.9% previously) while fixed asset investment growth fell below expectations (+11.4% yoy vs. +11.9% expected) and down from +12.0% in April. DB’s Zhiwei Zhang noted that the fiscal slide continued last month with total government income growth deteriorating to -5.6% yoy from -4.7% in April. Zhiwei continues to believe that the economy improves in Q3 as various easing measures feed through. He also reiterates his view that China will continue both fiscal and monetary policy easing in the next few months and the fiscal deficit will expand to 3.7% of GDP. He forecasts GDP growth to bottom in Q2 at +6.8% yoy and rebound slightly to +7.0% in Q3 and +7.2% in Q4.

Looking at the day ahead, Euro Area industrial production will likely attract the bulk of the attention in the European timezone this morning, while UK construction output is also due. Over in the US this afternoon, PPI data for May will be the key as well as the preliminary June University of Michigan Consumer Sentiment reading.