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.
