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Market Wrap: Global Risk Rattled By Syriza Surge To Power

This morning both the SNB stunner from two weeks ago, and the less than stunning ECB QE announcement from last Thursday are long forgotten, and the only topic on markets' minds is the startling surge of Syriza and its formation of a coalition government with another anti-bailout party - a development that many in Europe never expected could happen, and which has pushed Europe to the bring of the unexpected yet again. And while there is much speculation that this time Europe is much better positioned to "handle a Grexit", the reality is that European bank balance sheets are as bad if not worse than in 2014, 2013, 2012 or any other year for that matter, because none of ther €1+ trillion in NPLs have been addressed and the only thing that has happened is funding bank capital deficiencies with newly printed money. You know what they say about solvency and liquidity.

In any event, Syriza's dramatic ascent to power now places Greece on collision course with the Troika, and certainly Germany, a collision that everyone will be watching closely, and none other more than various other regional breakaway powers such as Spain's Podemos which is already riding on the coattails of Syriza's victory.

All of this is also being manifest in sentiment toward risk this morning, which has seen a bit of a bounceback following a sharp selloff in the overnight futures, one which wiped out all the market gains since the announcement of Draghi's Q€.

Asian markets kicked off the week on a cautious note with focus on SYRIZA’s victory in Greece. US equity futures fell with the Nikkei 225 (-0.3%) following suit amid a strong JPY, underpinned by flight to safety flows. Shanghai Comp (+0.94) and Hang Seng (+0.24%) rallied late in the session after lacking direction for most of the day, continuing on from last week’s sharp post-Chinese GDP gains.

European equities are marginally in the green after a choppy morning session following the Greek elections, with the only tier 1 data this morning, German IFO Business Climate (106.7 vs Exp. 106.5, Prev. 105.5), coming in slightly above-expected but having no sustained reaction. The FTSE is the underperformer as mining names weigh on the index as a result of falling commodity prices as well as the Athens Stock Exchange, which opened 3% lower, with banks weighing in the sector, opening 7% lower, however these losses have been mostly pared throughout the morning.

In terms of stock specific stories, news over the weekend suggested that IBM (IBM) are to lay off 26% of their global workforce this week and Pfizer (PFE) are said to have been rebuffed by Teva (TEVA) in their search for an M&A deal. This news has seen Shire (SHP LN) trade higher this morning, along with news that the US FDA have said it would license their Natpara drug.

Elsewhere, Bunds are lower on the day after failing to sustain a break above 159.00 shortly after the open and settled below the handle with little price action for the rest of the European morning, while Greek bond yields are wider to the German benchmark by 40 bps this morning. Short sterling has been weighed upon by more hawkish than usual comments from BoE’ Carney (Neutral), who warned that low interest rates may not last as long as investors expect, which echoed similar comments from Forbes (Soft Hawk) over the weekend.

Volumes may be lighter than usual heading into the US session as the North-east of the US faces a 'potentially historic blizzard' which would lead to 3ft of snow, with heavy snowfall forecast from Philadelphia to Maine and blizzard warnings issued in both New York and Boston.

In FX, the European session has seen a retracement of heavy selling pressure in EUR/USD following on from the pair falling below the 1.1100 handle for the first time since 2003 during Asian hours. However, this morning sees the greenback coming off its eleven year highs to see EUR/USD rise around 50 pips back above 1.1200, with European participants considering the reaction to SYRIZA’s victory over-exaggerated, as the victory has been widely anticipated in Europe. Meanwhile, the pullback in USD has not seen USD/JPY able to fall back below the 118.00 handle, which was broken overnight.

RUB currently trades around session lows as the conflict with Ukraine continued to escalate over the weekend, with Ukrainian President saying that the Russian threat to Ukraine has increased and US President Obama hinting at new Russian sanctions.

The other noteworthy currency is CHF, with volatility continuing after the SNB announced the removal of the currency floor, where EUR/CHF currently resides below parity but has seen buying pressure throughout the European morning.

The commodity complex has seen gold pull back from its post ECB-QE announcement highs to trade below USD 1,185/oz, with the yellow metal failing to break above USD 1,300/oz overnight and falling throughout the morning. The energy sector sees Brent and WTI futures both in negative territory with the latter breaking below the USD 45.00 handle and continuing to trade around the handle throughout the European morning, partially as a consequence of the strong USD.

In summary: European shares stay mixed with the travel & leisure and autos sectors outperforming and oil & gas, basic resources underperforming. Syriza to form coalition with Independent Greeks party after Greek election. Euro reverses losses, Greek stocks pare Friday’s gain, Greek bond yields rise. Ruble weakens. German IFO above estimates. The Swiss and German markets are the best-performing larger bourses, U.K. the worst. Portuguese yields decline. Commodities fall, with natural gas, silver underperforming and nickel outperforming. U.S. Dallas Fed index due later.

Market Wrap:

  • S&P 500 futures down 0.3% to 2038
  • Stoxx 600 up 0.1% to 370.8
  • US 10Yr yield down 1bps to 1.79%
  • German 10Yr yield up 0bps to 0.36%
  • MSCI Asia Pacific down 0.2% to 140.8
  • Gold spot down 0.8% to $1283.2/oz
  • Euro up 0.29% to $1.1237
  • Dollar Index up 0.17% to 94.93
  • Italian 10Yr yield down 2bps to 1.51%
  • Spanish 10Yr yield down 0bps to 1.38%
  • French 10Yr yield up 1bps to 0.55%
  • S&P GSCI Index down 0.8% to 376.8
  • Brent Futures down 1.3% to $48.1/bbl, WTI Futures down 1.3% to $45/bbl
  • LME 3m Copper down 1.3% to $5447.5/MT
  • LME 3m Nickel up 0.3% to $14400/MT
  • Wheat futures up 0.1% to 530.5 USd/bu

Bulletin Headline Summary

  • Prime Minister-elect Alexis Tsipras forged an anti-austerity alliance within hours of his election victory, challenging European peers with a declaration that the era of bowing to international demands for budget cuts is over
  • The challenge for Tsipras now is to come good on his election pledges, including a writedown of Greek debt, while persuading creditors from ECB, IMF and European Commission to keep aid flowing
  • "The Greeks have the right to vote for whom they want,” Hans-Peter Friedrich, a deputy caucus leader for Merkel’s faction in parliament, told Bild newspaper. “We have the right to no longer finance Greek debt”
  • Finland remains open to discussions on extending maturities, lowering rates on Greek loans, Prime Minister Alexander Stubb says; however, “it’s unfathomable to make Finnish taxpayers pay for Greek stimulus policies”
  • Governor Haruhiko Kuroda says the Bank of Japan may need to get creative in any further monetary stimulus. Among options analysts highlight: regional-government bonds, a type of security that could aid public support
  • German business confidence rose in Jan. with Ifo institute’s business climate index advancing to 106.7, higher than forecast, from 105.5 in Dec.
  • A blizzard forecasters call “life-threatening” that may drop three feet of snow from New York to Boston has caused more than 1,800 flight cancellations and will likely block road and rail traffic, close schools and knock out power across the U.S. Northeast
  • Sovereign yields mostly lower; Greek 10Y yields surge 50bps. Asian, European stocks mostly higher, U.S. equity-index futures fall. Brent and WTI, gold and copper fall

US Event Calendar

  • 10:30am: Dallas Fed Mfg Activity, Jan, est. 4 (prior 4.1)

* * *

DB's Jim Reid Concludes the overnight recap

After the polls closed last night it soon became clear from the exit polls that Syriza had claimed a stunning victory although 12 hours later and with 95% of the results counted Syriza look to have fallen just short of an outright majority. Syriza have won 36.4% of the vote compared to 27.8% for the governing New Democracy party and are projected to win 149 seats vs the 151 needed for a majority on the 300 seat parliament. Even so, DB’s George Saravelos wrote last night that, “the election outcome in Greece this evening is at the very top-end of an “anti-austerity” mandate that the electorate could deliver.” So what next? First Syriza’s leader Alexis Tsipras now has a three day long “exploratory mandate” in which his party will negotiate with other parties to secure a majority. Alternatively Syriza could form a minority government where it will need to secure a tolerance vote from parliament – this requires only a majority of those MP’s present to secure the confidence vote and so Syriza could manage this if it agrees with smaller parties for them to stay away from the vote. Early reports suggest that Syriza will look to make a deal with the right-wing anti-bailout Independent Greeks party, with a Syriza official stating that, "There was an agreement with Mr Kammenos (leader of the Independent Greeks Party) to meet on Monday at 10:30 local time to confirm the support and possible participation of the Independent Greeks in the new government." In terms of what happens next, this same official suggested that, “most likely is that the prime minister will be sworn in on Monday and the new government will be sworn in on Tuesday evening or at the latest on Wednesday morning." Tsipras is also expected to meet with leaders of the centrist To Potomi and the Communist party KKE before taking up government (Reuters).

In terms of the formation of this government, George thinks that, “the positions of finance minister, PM chief of staff, and chair of the council of economic advisors are likely to form the core of a new government's negotiating team with the Troika and these appointments will therefore be closely watched.”

Looking ahead Parliament is scheduled to open on February 5th where its first job will be to elect a new President, which should take place by February 13th. Following this the new government will request a vote of confidence from parliament to allow it to begin negotiations with the Troika. After this the next big deadline for Greece is February 28th when the country’s current program expires and a major question for the new government is if they will request and whether they will be granted an extension on this. George Saravelos expects that, “it is in both sides' interest to secure an extension of the program to July to allow negotiations to proceed, but it is important that this materializes. ” From the European side we will probably get an early flavour for how Greek-Eurogroup negotiations will pan out later today as the Eurozone finance ministers meet later and are expected to give some sign over whether they would accept an extension. If this extension can be agreed then the Troika will likely send a mission to Athens in mid-February to start negotiations although Tsipras has indicated it is an open question whether or not they will be invited.

The situation in Greece is undoubtedly delicate with the nation’s banks having already requested liquidity assistance from the ECB due to deposit outflows and the Greek government's continuing need to issue debt. Ultimately the outcome here is going to depend on how negotiations between Syriza and the Troika go, with Syriza’s desire to achieve meaningful debt relief for Greece along with a reduction in austerity and changes to the country’s structural reforms all on Syriza’s policy platform. It is likely that the twists and turns of these negotiations will form the main narrative for Greek risk in the coming weeks. George sees a consensual outcome between the Greek government and its creditors as achievable but requiring very meaningful concessions from both sides and the chance of Greek government instability and fresh elections a possibility.

Looking slightly more widely, last night’s result marks a major political event for Europe and possibly a new era for European politics. It marks the first time that a non-mainstream party has won the reins of government in the aftermath of the crisis and may be a harbringer for more political turmoil to come for the region as non-mainstream parties grow ever closer to power. Syriza are the first to form a government. They may not be the last. How Greece under Syriza performs from here on will be an important test case for the region. Note that this still could be a slow burning issue. Our plate spinning analogy for 2015 suggested that the central banks would keep the plates spinning aggressively until a cure for gravity (sustainable growth) or a policy error or a political accident. With the ECB now being aggressive, the fall-out from yesterday's vote is likely to be limited unless no compromise can be made. However political risk is going to be the biggest challenge to the Euro over the years ahead. It might only take one rogue election result to seriously damage the whole project.

Overnight in Asia markets have been reacting to the news. EURUSD was as much as -1% lower in overnight trading but has recovered to be sat currently -0.23% lower. Risk has so far struggled with a number of Asian equity markets currently trading down – the Nikkei is -0.3% whilst the Hang Seng is -0.12% The US 10Y has been well bid with the rate falling another 4bps.

In other news over the weekend the conflict in eastern Ukraine seemed to heat up further after a rocket attack on the port city of Mariupol on Saturday. The US, NATA and OSCE said that the launch took place in rebel-held territory. At an emergency meeting on Sunday the Ukrainian President stated that separatists are attacking along the entire front line (Bloomberg news). The growing battles in the area are a sign of the escalation in the conflict and over the weekend the US and its allies have been putting pressure on the Russian government to use its influence on the rebels to curtail the violence and adhere to the September ceasefire, with Angela Merkel speaking with Vladimir Putin on the phone yesterday to this end (Reuters).

Looking back to last Friday, markets were broadly strong as they traded with greater conviction on Thursday’s ECB move although they pared back some of their gains later in the day as Greek concerns began to rise not helped by Syriza’s Tsipras comments that Syriza doesn’t recognize commitments made by previous governments. Nevertheless the ECB impulse won out with the Stoxx600 closing the day up +1.5% and iTraxx Main and Crossover closing -1.4bps and -4.7bps respectively. Government bonds also rallied (10Y US and German yields closed the day -5bps and -9bps) and the EUR continued to fall as EURUSD lost another -1%. Even Greek 10Y bond yields managed to fall 40bps. The clearest disappointment was US equities as the S&P500 closed the day down -0.6%, partly on the back of the weaker US manufacturing PMI which fell to 53.7 its lowest read in a year vs. expectations it would rise to 54.

There are few major data points today with the December Spanish PPI data (expected to rise to -0.9% from -1.1% MoM) and the January German IFO surveys due out (all components are expected to improve) as well as the already discussed Eurogroup finance ministers meeting in Brussels. We will also get earnings reports from Microsoft. Overnight we will have Chinese industrial profits for December.

Looking ahead to the rest of the week, tomorrow the German and Italian finance ministers will speak at an EU committee and the EU finance ministers will meet. In the UK we will get Q4 GDP (expected to slip slightly to +0.6% QoQ) and France will release its latest jobseekers data. We will also get US durable goods orders, Case-Shiller house prices, composite and services PMI’s, new home sales and consumer confidence. On Wednesday we have one of the highlights of the week with the FOMC’s latest meeting – whilst there isn’t scheduled to be a press conference or the release of the Fed’s Summary of Economic Projections there will nevertheless be a statement. On Thursday we will have the latest Italian confidence and wage data, euro area confidence, German January inflation (expected in at -0.2% YoY), US initial jobless claims and Japanese inflation (expected to slip to +2.3% YoY). Finally to close the week we will have German December retail sales, Spanish Q4 GDP (expected in steady at +0.5% QoQ), euro area inflation and unemployment, and Q4 US GDP (expected to slip to +3.1% QoQ annualised) and core PCE inflation.

Whilst the current earnings season is taking a back seat given all the macro developments, we could have some interesting highlights this week as we see results from some of the major oil and gas companies. Indeed we have 9 of them reporting including names such as ConocoPhillips and Chevron. Earnings will likely be impacted from the downturn in oil but perhaps more importantly we will hear their thoughts around what lies ahead for the sector. Interestingly the four US energy companies that have reported so far aren't doing that badly relative to the market's earnings expectations but we suspect that's also because most of them are oil drillers where earnings haven't been much impacted by the downturn yet. There's perhaps also a stronger focus on cost and balance sheet discipline in Q4 but overall the outlook still remains challenging as evinced by some of the job cuts announced by the likes of Schulumberger and Halliburton so far. We've updated our usual earnings tracker table in the PDF today. Whilst only 74 S&P 500 companies have reported so far, the earnings and revenue performance is largely similar to those we've seen in previous years. The EPS beats (73% of total) are a lot stronger than sales beats (49% of total) so far. A similar trend is also emerging on the other side of the Atlantic where EPS beats (80% of total) are much stronger than revenue beats (36% of total) although it is still very early days for the European reporting calendar.