There was much confusion yesterday when algos went into a buying frenzy on news that Greece would submit a request for a 6 month loan extension, believing this means Greece has caved and will agree to a bailout programme extension as well. Nothing could have been further from the truth as we explained first moments after the headline struck, and also as Reuters validated moments ago when it said that “Greece will submit a request to the euro zone on Wednesday to extend a “loan agreement” for up to six months but EU paymaster Germany says no such deal is on offer and Athens must stick to the terms of its existing international bailout.” But since the political nuances of diplomacy are lost on the math Ph.Ds who program the market-moving algos, the S&P did manage to roar above 2100 on what was another headfake and then forgot to sell off on the reality.
As a result, the key event today is not the FOMC minutes which will have some nebulous discussion of just what “patient” means or doesn’t, as pundits bang their heads whether the Fed will hike in June completely oblivious to the “GDP-crushing” record cold weather outside and the West Coast Port strike that will lead to a plunge in February and March retail sales and Q1 GDP, but the ECB’s decision whether to boost, keep unchanged or even reduce Greek access to emergency funding, a step which will put the Greek endgame into play concluding with either a full capitulation by the government or a Grexit.
As previously noted, the impact on the market from all of the above was based on the headline kneejerk reaction, where algos read into the “bullish” and ignored the nuances between the lines. As a result, yesterday’s source reports suggested that Greece are to request an extension of the loan program for 6-months which was later confirmed at the open having already supported sentiment globally as the S&P closed at record highs and the Nikkei saw out the session higher by 1.2%. The improved sentiment filtered through to European equities as they reside in the green, however Bunds and UST’s have remained directionless and trade relatively flat on the session. Greek asset classes have also been buoyed by the news out of Athens with the ASE outperforming European stocks and Greek yields falling lower in the morning. In other news, the Swiss government is preparing tighter capital requirements for ‘too big too fail’ banks (UBS and Credit Suisse) which now see the SMI underperform albeit still in positive territory.
Sources indicated that the ECB is considering removing ELA for Greek banks in order to increase pressure on Greece to accept an extension of their current bailout programme. However, sources said the ECB are unlikely to do that immediately.
Asian equity markets rose led by a strong Wall Street close which saw the S&P 500 finish at a record high, amid reports that Greece could ask for a 6-month loan extension as early as today. Consequently, the Nikkei 225 (+1.2%) rallied to trade at its highest levels since Sept’07 while the ASX 200 (+0.7%) rose to levels last seen in May’08. The latter was further underpinned by M&A activity as Japan Post offered to buy Toll Holdings (+46%) for USD 5.1bln. As a reminder, Chinese, South Korean and Taiwanese markets are closed due to the New Lunar New Year, while the Hang Seng (+0.2%) was only open for the first half of trade.
Meanwhile, the overall positive UK jobs report which saw the UK Jobless Claims Change (Jan) M/M -38.6k vs Exp. -25.0k allied with hawkish comments from the BoE minutes, with two members of the MPC stating that a rate hike could occur in the year lifted GBP/USD by 53 pips on a break through 1.5400 and sent short sterling lower by 3 ticks. Elsewhere, EUR/USD was under selling pressure at the open spurred on by the recovery in the USD led by USD/JPY after RANsquawk sources note macro funds buying in the pair. However, upside was not sustained as the USD has since come off highs.
In the commodity complex, Brent and WTI crude have edged lower in the session breaking below USD 62.00 and USD 53.00 respectively in the process, ahead of the build expected in the DoE crude inventories data release tomorrow. Elsewhere, heightened risk appetite has sent Gold lower coupled by slowing demand for Gold due to the Chinese Lunar holiday as Chinese markets are closed for the week-long holiday. In the latest update, the United Steelworkers Union are considering increasing the scope of their strike to their Californian port.
