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Futures Rebound On Collapse In Greek Negotiations, After Europe's Largest Derivatives Exchange Breaks

There was a brief period this morning when market prices were almost determined by non-central banks. Almost. Because shortly before the European market open, a technical failure on the Eurex exchange - Europe's largest derivatives market - prevented trading in euro-area bond futures the day after Greek debt talks collapsed. Derivatives which, as a reminder, are no longer used for hedging but to directly "generate alpha" and to trade risk with massive leverage.

Initially, traders were unhappy, "it’s  concerning to those wanting to trade given the geopolitical concerns surrounding Greece" said one. "Very unfortunate day to experience problems" added another." But the real reason for today's unexpected market shut down was to avoid early indiscriminate selling of course, following yesterday latest Greek fiasco.

And sure enough, after initially seeing significant downward pressure expressed mostly by the EURUSD, which nobody could capitalize on of course courtesy of the broken Eurex, risk both in Europe and the US has since rebounded courtesy of the ECB, SNB and BIS, led by the EURUSD (because a Grexit threat which according to Commerzbank has been raised from 25% to 50% is bullish for the artificial currency), which is now at yesterday's pre-negotiations highs, and US futures are about to go green.

Aside from market "glitches", which are now to be expected every time there is a less than "priced to perfection" development, focus for the European open largely resided in yesterday’s breakdown in talks between Greece and the Eurogroup after Greek officials rejected a draft proposal which sought to increase the flexibility of the existing bailout programme and extend it by 6 months. This latest update subsequently led to a relatively pessimistic open for Europe, with index futures and Bunds eventually opening lower and higher respectively after a delayed start to Eurex trade. Furthermore, in terms of Greek assets, Greek bonds opened lower with Greek 3y's higher by 176bps to 18.7%, ASE down 4%, Greek banking index down 8.6%, however the ASE pared its losses throughout the European morning, with the Greek banking index residing in positive territory (+3%) as the market anticipates an eventual deal. Of note, JPM suggest outflows of EUR 2bln per week which if continues means there will be no deposits for Greek banks to lend from. This means Greek banks could stop lending in 14 weeks.

Nonetheless, as the session progressed, European equities managed to pull away from their worst levels with Bunds coming off their best levels in a pullback of yesterday’s price action, with a bulk of the move taking place before yesterday’s Eurex close. Furthermore, one thing to bear in mind is that Greek Finance Minister Varoufakis said there will undoubtedly be an agreement on debt discussions and will do everything that is necessary to secure an agreement over the next few days.

Asian markets traded mixed amid dampened risk appetite after yesterday’s Eurogroup and Greek bailout crunch meeting reached an impasse. Nonetheless, the Hang Seng (+0.25%) and Shanghai Comp (+0.76%) outperformed, the latter poised for the best pre-holiday rally since 2007, ahead of the week-long Lunar New Year holiday. Elsewhere, the Nikkei 225 (-0.1%) finished relatively flat just shy of the 18,000 level after recovering earlier losses bolstered by late JPY weakness.

In FX markets, AUD has managed to hold on to its gains after the RBA’s Feb 3rd meeting minutes, which were perceived to be less dovish-than-expected. The central bank failed to provide a clear guidance on its future rate path and largely reiterated comments previously seen. Markets are now pricing a 56% chance of the RBA cutting rates by 25bps in March vs. 74% chance before the release of the minutes. From a data perspective, the main release so far has been that of UK CPI with both the Y/Y and M/M printing a record low (Y/Y 0.3% vs Exp. 0.4%, M/M -0.9% vs Exp. -0.8%). Nonetheless, GBP actually saw a bout of strength following the release, given the inflation levels were very much in-fitting with the findings of the BoE’s QIR.

Elsewhere, EUR saw some broad-based strength after EUR/GBP tripped stops through 0.7400 to the upside heading into the UK CPI report, while German and Euro-zone ZEW data failed to impact EUR, but did see Bunds continue to edge below 159.00.

In the commodity complex, gold and silver weakened overnight as prices halted a 3-day consecutive advance, with buying from China expected to dwindle heading into the week-long Lunar New Year holiday. Copper traded relatively range-bound with prices managing to eke out mild gains as stimulus hopes for China increased following more poor data from the world’s largest copper consumer which showed property prices fell by 5.1%, its largest decline on record.

In energy markets, WTI and Brent crude futures have traded in the green throughout the session underpinned by a weak USD and weekend comments from Kuwait oil minister who suggested oil will continue to recover in H2.

Summary: European shares rise from intraday lows to trade little changed with the travel & leisure and tech sectors underperforming and basic resources, oil & gas outperforming.  Talks between Greece and its creditors ended abruptly Monday night, Greece rejected European proposals to stick to the existing terms of its bailout. U.K. inflation slows more than forecast to record low. Chinese new-home prices recorded biggest y/y decline ever. European car sales growth accelerated in January. Indonesia unexpectedly cuts rate. The Swedish and German markets are the worst-performing larger bourses, the Italian the best. The euro is stronger against the dollar. Japanese 10yr bond yields fall; Greek yields increase. Commodities gain, with silver, zinc underperforming and natural gas outperforming. U.S. Empire manufacturing, NAHB housing market index,  mortgage delinquencies, mortgage foreclosures due later.

Market Wrap

  • S&P 500 futures down 0.2% to 2089.6
  • Stoxx 600 little changed at 376.4
  • US 10Yr yield down 2bps to 2.03%
  • German 10Yr yield up 1bps to 0.34%
  • MSCI Asia Pacific down 0.1% to 143.3
  • Gold spot down 0.7% to $1222.8/oz
  • Eurostoxx 50 -0.5%, FTSE 100 +0.3%, CAC 40 -0.4%, DAX -0.6%, IBEX -0.4%, FTSEMIB +0.3%, SMI -0%
  • Asian stocks little changed with the Shanghai Composite outperforming and the ASX underperforming.
  • MSCI Asia Pacific down 0.1% to 143.3
  • Nikkei 225 down 0.1%, Hang Seng up 0.2%, Kospi up 0.2%, Shanghai Composite up 0.8%, ASX down 0.5%
  • Euro up 0.32% to $1.1391
  • Dollar Index down 0.1% to 94.11
  • Italian 10Yr yield down 3bps to 1.64%
  • Spanish 10Yr yield up 1bps to 1.59%
  • French 10Yr yield little changed at 0.66%
  • S&P GSCI Index up 0.3% to 427.4
  • Brent Futures up 1.1% to $62.1/bbl, WTI Futures up 0.9% to $53.2/bbl
  • LME 3m Copper down 0.8% to $5705/MT
  • LME 3m Nickel down 1.2% to $14430/MT
  • Wheat futures up 1.6% to 537.8 USd/bu

Bulletin Headline Summary from Bloomberg and RanSquawk

  • European markets retrace some of yesterday’s Greek/Eurogroup sell-off despite yesterday’s breakdown in talks
  • UK CPI saw both the Y/Y and M/M printing a record low, however GBP actually saw a bout of strength following the release given the levels were in-fitting with the findings of the BoE’s QIR
  • Looking ahead, there is US Empire Manufacturing (1330GMT/0730CST), speakers in the form of ECB’s Noyer (Soft Dove), Fed’s Plosser (Non-Voter, Hawk) and BoE’s Haldane (Neutral)
  • Treasuries steady as Greece edged closer to a euro exit after region’s finance ministers said there will be no more talks on financial support unless the Greek government requests an extension of its existing bailout program.
  • The standoff between Greece and its creditors risks triggering a simultaneous cash and credit crunch, which could drive the country out of the euro area
  • Draghi’s plan to jolt the euro zone out of its economic malaise by buying EU1.1t ($1.3t) of bonds may be hamstrung even before it starts amid a dearth of new supply and a lack of willing sellers
  • Britain’s inflation rate fell more than forecast to a record-low 0.3% as food and fuel prices plunged
  • German investor confidence as measured by the ZEW Center rose to 53 in February, a one-year high, from 48.4 in January
  • A cease-fire in eastern Ukraine is being ignored in the strategic transport hub of Debaltseve, where raging battles risk undermining a fragile peace accord sealed after all-night talks last week in Belarus
  • Thousands of people marched through Copenhagen in freezing winds to remember the victims of a weekend shooting that police say may have been an attempt to copy the massacre at Charlie Hebdo in Paris
  • A federal judge in Texas has ordered a halt, at least temporarily, to Obama’s executive actions on immigration, siding with Texas and 25 other states that filed a lawsuit opposing the initiatives: NYT
  • Sovereign yields mixed; Greece 10Y yield surges ~55bps to 10.21%. Asian stocks gain, European stocks and U.S. equity-index futures mostly lower. Brent and WTI higher, gold and copper decline

US Event Calendar

  • 8:30am: Empire Manufacturing, Feb., est. 8.50 (prior 9.95)
  • 10:00am: NAHB Housing Market Index, Feb., est. 58 (prior 57)
  • 4:00pm: Net Long-term TIC Flows, Dec. (prior $33.5b)
    • Total Net TIC Flows. Dec. (prior -$6.3b)
  • Mortgage Foreclosures, 4Q (prior 2.39%)
  • Mortgage Delinquencies, 4Q (prior 5.85%)
  • 12:45pm: Fed’s Plosser speaks in Philadelphia

DB's Jim Reid as traditional concludes the overnight event summary

Perhaps it was never going to be quite close enough to one minute to midnight for an agreement as the two sides held their ground and talks therefore collapsed. The Eurogroup continues to insist on Greece applying for an extension to their existing programme whereas Greece wants a bridge loan ahead of a new deal as they view the current one as having failed.

So where are we left? If there is going to be an extension to the program beyond expiry on 28th February then it has to be agreed by the end of this week to allow ratification by various member state parliaments. There's been talk of another Eurogroup meeting that could be held on Friday but one side would have to back down and listening to the Eurogroup President Dijsselbloem one would think it would have to be Greece. An alternative would be for Greece to apply for a fresh ESM loan post Feb 28th but as Mark Wall pointed out last night, the conditionality would likely be every bit as tough and may meet resistance from member states given its a new loan not an extension of an existing one.

Comments from Greek finance minister Varoufakis after talks ended suggested that Greece would be prepared to extend the current programme so long as the terms are satisfactory. Speaking shortly after, Varoufakis was quoted as saying on Reuters that ‘I have no doubt that, within the next 48 hours Europe is going to come together and we shall find the phrasing that is necessary so that we can submit it and move on to do the real work that is necessary’. Greek press Ekathimerini reported meanwhile that Varoufakis had earlier in the day been happy to sign a communiqué provided by the EC and Monetary Affairs Commissioner Moscovici which allowed for a four-month loan agreement in return for certain conditions, however this statement was later changed in the Eurogroup to an extension of the current program which Varoufakis then rejected. At this point Dijsselbloem then halted the meetings and put the pressure on the Greek side to come forward with a proposal ahead of a possible Friday meeting.

DB’s resident expert George Saravelos suggests the conditions of any extension or new deal are becoming clearer. We know that specific conditions will be mandatory either way through a commitment to fulfill financial obligations, a commitment to not take unilateral actions and a commitment to conclude the programme. In return Greece would be granted ‘flexibility’ potentially around the fiscal path and structural reforms. George also notes that the program conclusion on the 28th February is not the point of no return, but the soonest of when Greek banks are no longer able to access additional ELA at the ECB or when the Greek government runs out of financing. Ultimately George still believes we still have the same three step process for Greece in firstly requesting for a new program, secondly negotiating the substance and thirdly passing this through parliament. The difference now is that time pressure has only increased after yesterday’s outcome. George’s report is attached below for those interested.

In terms of the market reaction post meeting, having traded some +0.2% firmer in the lead up to yesterday’s meeting, the Euro dropped around -0.8% - as headlines started to filter through the wires - to trade at an intraday low of -0.6% versus the Dollar. The currency did pare back some of the losses however but is still -0.5% below the pre-meeting levels at $1.136 as we go to print. The broader risk off tone lent support to Bunds last night with the 10y yield dropping to 0.334% having earlier traded closer to 0.35% pre-meeting. S&P 500 futures this morning are trading some -0.4% softer and 10yr US Treasury yields are 4bps lower. Asian bourses however are generally mixed. The Nikkei (-0.04%) and ASX (-0.52%) are lower although the Hang Seng (+0.24%) and Shanghai Composite (+0.80%) are firmer as we go to print. China property market data continued to be weak but some saw small signs of stabilisation in the data even as prices continued to fall. Chinese markets are closed for a week of holiday as of tomorrow.

Back to markets yesterday, with the US closed for a public holiday the focus was on Europe although in reality it was a fairly subdued trading session with the market somewhat on hold in the lead up to the meeting. Sentiment was lower leading up to the meeting and not helped by pessimistic comments by German finance minister Schaeuble in the lead up. The Stoxx 600 closed -0.14% whilst the DAX (-0.37%) and CAC (-0.16%) finished lower. Greek equities meanwhile finished 3.83% lower and 3y yields widened 175bps. Data took a backseat to the Greece events as the Euro-area reported a larger than expected trade surplus (€23.3bn vs. €19bn expected). In terms of oil, brent (-0.2%) meanwhile was more or less unchanged.

Elsewhere, conflict in the Ukraine appears to be continuing with the first reported deaths announced yesterday since the ceasefire officially commenced. Reuters reported that pro-Russian rebels encircled Ukrainian government forces with Kiev saying that they would not pull back heavy guns whilst a truce is being negotiated. Russian equities yesterday closed -2.04% weaker although Ukrainian equities (+0.96%) closed higher.

It’s a busier day data-wise today. Starting in Europe we kick off with inflation data in the UK. The ZEW survey for Germany and the Euro-area will also be of focus this morning. With markets open again in the US, we get the NAHB housing market index for February along with the NY Fed Empire manufacturing reading. The Fed’s Plosser will also be due to speak today, specifically on monetary policy.