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Buying Euphoria Fizzles Ahead Of Make Or Break Tsipras-Merkel Talks

As previously observed (skeptically), a main reason for the surge in the DAX, and thus the S&P, on Friday was premature hope that the Greek talks on Thursday night were a long-overdue precursor to a Greek resolution, and as we further noted yesterday, subsequent bickering and lack of any clarity as we go into today's critical "final ultimatum" meeting between Merkel and Tsipras, is also why the Dax is lower by 1.1% at last check, even if the EURUSD continues to trade like an illiquid, B-grade currency pair whose only HFT purpose is to slam all stops within 100 pips of whatever the current price may be.

Not helping the weak euro case was a plethora of research reports (to follow in subsequent post), which saw the penguin consensus reiterate that despite the Fed's rhetoric, the strong dollar case is the dominant one for the coming months and well into the summer. As for whether the last few hours' stop hunt higher in the EURUSD is credible, one look at where oil is trading (based on fundamentals or rate differentials) suggests the latest spike in the EUR is to be faded. Indicatively, Brent and WTI are trading down ~$1/bbl as talks on Iran nuclear program enter final week before political deal due, with both sides saying agreement is reachable. In addition, Saudi’s Naimi says OPEC would have lost market if it cut output, with the kingdom pumping 10 million barrels per day.  Among the soundbites Naimi made was that "oil won’t rebound to $100/bbl because increased prices would  draw more shale, and other higher-cost output to market."

But back to the main event of the day, as focus falls on Greece once again as the Greek PM Tsipras looks to meet with German Chancellor Merkel today after sending a letter to her last week which said it will be “impossible” to service near-term debt obligations. The two will meet from 1600GMT, with a press conference tentatively scheduled for 1800GMT and a working dinner from 1900GMT. Lingering concerns around the periphery has caused some selling pressure in Greek bonds and the 3y yield sits higher by ~40bps, although the domestic Greek stock market remains unfazed and trades with marginal gains.

How big is today's meeting? As Hajo Funke, political scientist with Berlin’s Free University, told AFP earlier, “two worlds will collide” when Merkel and Tsipras sit down this afternoon:

"There is the political world of Greece, where a left-wing government faces a society in collapse, (of) societal decay... as grave as anything we have seen in western Europe since 1945."


“The other world is a content country that is dominant in Europe, Germany, which worries about maintaining its economic happiness, and which is now being asked to help the other, under conditions it doesn’t fully understand.”

So yes: today's meeting (4:00 PM GMT), the subsequent press conference (6:00PM GMT), could well lead to a symbolic "last supper" for Tsipras at 7:00PM.

Asian equities traded mostly higher after taking the impetus from Friday’s strong Wall Street close, which saw the S&P 500 gain the most since the start of February. The Shanghai Comp (+2.0%) rose for a 9th day, the longest winning streak since Apr’07 as cash flowed back into the market after the end of subscriptions for the recent slew of IPOs. Elsewhere the Nikkei 225 (+1.0%) rose to hit yet another fresh 15yr high led by health care stocks. The ASX 200 (-0.3%) was the session’s laggard after an earlier failed attempt at testing the 6,000 key psychological level.

Positive sentiment from Asia failed to follow through to Europe, with selling seen in the DAX in the first hour of trade, exacerbated by a break below Friday's low and the FTSE 100 back below 7000 as concerns over Greece weigh on the sentiment and as oil prices continue to slide.

This week sees a downtick in Eurozone supply with EUR 13-14bln on offer. Belgium get things underway on Monday with a trio of OLOs, followed by Netherlands on Tuesday and Italy on Thursday for which sizes are still yet to be announced. Speculation has been that Portugal could come to market on Wednesday but this is still yet to be confirmed. From a redemption perspective there is nothing too significant to report. The US come to market with 2s, 5s and 7s and 2y FRNs. The size of the auctions remain unchanged at USD 26bln, USD 35bln, USD 29bln and USD 13bln respectively although some of the USD 103bln hitting the market will be offset by the prospect of USD 78bln in 2-, & 5y redemptions due for payment on Tuesday 31st March. Supply this week equates to ~500K 10 future equivalent.

Once again FX markets have also been in focus and the USD index saw an early bid which has consequently caused EUR/USD to slide to fresh lows and a lower EUR seen as a headwind for exporters from core Europe. NZD outperformed overnight, underpinned by a sell-off in AUD/NZD as the cross touched a fresh record low, attributed to large fund liquidations and NZD/USD hit a 2-month high after large buy-stops were triggered in the cross at 0.7610. AUD also strengthened in sympathy as AUD/USD reclaimed the 0.7800 handle, further bolstered by selling in EUR/AUD after the earlier break below the 1.3900 handle and medium-term support at 1.3881 (Wed & Thurs low). In EUR/USD large vanilla option expiries are seen at 1.0850 with USD 1.5bln due to roll off at the 10am NY cut.

In summary: European shares fall, at session low, with the autos and chemicals sectors underperforming and banks, financial services outperforming. Greek PM Tsipras set to meet German Chancellor Angela Merkel for 2nd time in 5 days today. U.S. oil declines as Saudi Arabia said it was pumping near record amounts of crude. The German and French markets are the worst-performing larger bourses, the Spanish the best. The euro is little changed against the dollar. Japanese 10yr bond yields fall; German yields decline. Commodities decline, with natural gas, WTI crude underperforming and wheat outperforming. U.S. Chicago Fed index, existing home sales,  due later.

Market Wrap:

  • S&P 500 futures down 0.2% to 2095.1
  • Stoxx 600 down 0.7% to 401.1
  • US 10Yr yield little changed at 1.93%
  • German 10Yr yield down 1bps to 0.18%
  • MSCI Asia Pacific up 0.6% to 148.4
  • Gold spot down 0.1% to $1181.7/oz
  • Eurostoxx 50 -0.8%, FTSE 100 -0.3%, CAC 40 -0.8%, DAX -1.2%, IBEX little changed, FTSEMIB -0.3%, SMI -0.4%
  • Asian stocks rise with the Shanghai Composite outperforming and the ASX underperforming.
  • MSCI Asia Pacific up 0.6% to 148.4
  • Nikkei 225 up 1%, Hang Seng up 0.5%, Kospi little changed, Shanghai Composite up 1.9%, ASX down 0.3%, Sensex down 0.2%
  • Euro down 0.06% to $1.0815
  • Dollar Index little changed at 97.91
  • Italian 10Yr yield up 1bps to 1.22%
  • Spanish 10Yr yield up 2bps to 1.2%
  • French 10Yr yield up 1bps to 0.45%
  • S&P GSCI Index down 0.7% to 395.3
  • Brent Futures down 1.3% to $54.6/bbl, WTI Futures down 2.2% to $45.5/bbl
  • LME 3m Copper up 0.5% to $6074.5/MT
  • LME 3m Nickel down 0.3% to $14205/MT
  • Wheat futures up 1.6% to 538.3 USd/bu

Bulletin Headline Summary from RanSquawk and Bloomberg

  • European equities trade lower on Greek concerns, a technical break below Friday’s low in the DAX and 7,000 in the FTSE 100, a slide in oil prices and a further bid in the USD index
  • The Greek PM Tsipras will meet with German Chancellor Merkel today after sending a letter to her last week which said it will be “impossible” to service near-term debt obligations
  • Tsipras and Merkel are set to meet from 1600GMT, a press conference is scheduled for 1800GMT and working dinner at 1900GMT
  • Treasuries steady, 10Y yield holds below 50- DMA amid declines in European stocks, U.S. equity-index futures; week’s auctions begin tomorrow with 2Y fixed and FRN.
  • Greek PM Tsipras is set to meet Merkel for the second time in five days on Monday, at the start of a week that may prove decisive for Greece’s future in the euro area; Greek 3Y notes yield 21.05%
  • Greece won’t get any money from European rescue fund until all proposed reforms have been implemented, Spanish Economy Minister Luis de Guindos says in interview with FT
  • In the past month, central bankers from Ottawa to London have used speeches to highlight how their local inflation rates may be driven by events outside their control, complicating their ability to set the right monetary policy
  • Japan’s government raises economic assessment for first time in 8 months, sees improvement in corporate sector
  • China is considering sweeping changes to its securities industry that would allow foreign banks to control their local joint ventures and broaden their offerings, said people with knowledge of the matter
  • WSJ reports U.S. to seek collaboration with China-led Asian Infrastructure Investment Bank;  U.S. allies, including U.K., Germany, France, have lined up to become founding members of AIIB
  • Draghi cheerleads for economy as Greek risk looms over Euro area
  • Ukraine’s plummeting bond prices are signaling that creditors including Franklin Templeton face steep writedowns in the nation’s foreign debt restructuring
  • Ukraine arms movement puts truce at risk, NATO’s Breedlove says
  • Fitch warns Turkey on policy credibility as outlook kept stable
  • Lee Kuan Yew, who helped transform Singapore from a colonial trading center into one of Asia’s most prosperous nations during 31 years as its first elected prime minister, has died at the age of 91
  • Sovereign 10Y yields mostly lower. Asian stocks mixed, European stocks and U.S. equity-index futures decline. Crude falls, gold little changed, copper rises

US Event Calendar

  • 8:30am: Chicago Fed Nat Activity Index, Feb. (prior 0.13)
  • 10:00am: Existing Home Sales, Feb., est. 4.94m (prior 4.82m)
  • Existing Home Sales m/m, Feb., est. 2.5% (prior -4.9%)

Central Bank Speakers

  • 9:30am: Bank of Canada’s Poloz speaks in London
  • 10:00am: Fed’s Williams speaks by videoconference to Sydney, Australia
  • 12:00pm: Fed’s Fischer speaks in New York

DB's Jim Reid concludes the weekend event summary

This week perhaps the main macro interest (tomorrow) will be on seeing whether the US stays in slight deflation and whether the UK gets ever closer to it for the first time since the early 1960s. This will be an interesting follow-up to last week's focus on the Fed and where Fed Funds might move over time. At a headline level the US is likely to remain in slight annual deflation for the second month (expected to hold -0.1%YoY) even if the core ticks up one-tenth of a percent as expected to +1.7% YoY. With Oil continuing to be weak, the YoY headline rate is expected to be negative for many of the next few months in the US. Meanwhile, UK headline CPI is expected to edge closer to annual deflation (+0.1% YoY expected). Negative prints will surely follow soon which is something Mark Carney anticipated when he spoke last week.

As you'll also remember from last week, Bank of England chief economist Andy Haldane suggested that the next move in rates might actually be down. While he appears to be a lone voice at the top of the BoE it is an interesting development. The UK has become a high yielder in Europe and the currency has responded accordingly which might eventually persuade more at the bank that they may have to consider a more dovish stance. Could these thoughts translate across the Atlantic? Indeed it’s worth repeating our thoughts on Friday where we suggested that if you were just presented with the facts on the US economy from scratch with no bias would you say the next move in rates would be up or down? We're all anchored to expecting a rate rise to come sooner rather than later (for well known reasons) but with negative inflation, the weakest recovery on record, low wage growth, a decade plus high in the currency, economic surprises at 6-yr lows and still near record debt levels an outsider starting from scratch might well conclude that the economy needed more stimulus not less, especially if they weren't told the current Fed Funds rate. As we said on Friday removing stimulus to stop rolling bubbles is a valid reason to hike but it’s a dangerous one given how addicted markets have become to stimulus. So overall, I wonder what probabilities you'd get on the next move from the Fed being an easing one?

Greece may well be another big headline grabber this week. On Friday, positive headlines appeared to provide some support for risk assets in Europe. The better sentiment in particular appeared to centre on some talk that Greece could receive a portion of bailout money early should the government come forward with adequate reform proposals. Meanwhile the WSJ noted that European officials suggested that loans could be paid out in installments if tangible progress was made. Despite the headlines, we still remain cautious on progress given the hurdles that need to be passed. The cash position continues to deteriorate and in the mean time a full agreement still needs to be achieved between Europe and Greece, as well as the Greek government passing any reforms through parliament. Over the weekend the Spanish finance minister Guindos was quoted in the FT saying that Greece would not receive any funding until a full set of reforms were signed off. The FT is also carrying a story this morning that Tsipras sent a letter to Merkel a week ago outlining that unless Europe distributes short-term funds it will be "impossible" for Greece to service near-term debt obligations. Talks continue today with Tsipras due to meet Merkel in Berlin in what could be a crucial week given the imminent pressure on the Greek government to speed up their progress. In the mean time, our European economics colleagues have put together a ‘what if’ analysis on the short and long-term consequences of a Grexit. Their base case remains that a balanced compromise will be found, but they think the risk of a political accident is still very high and a Grexit is still a scenario which cannot be ruled out.

Briefly recapping markets on Friday, we saw another trend reversal day in the US with the S&P 500 closing +0.90% and Dow +0.94%. Despite now trading between gains and losses for 8 consecutive sessions, the S&P 500 did halt its run of 3 weekly declines with a +2.7% return last week. Gains were largely broad based but led by the energy component (+1.37%) in particular after both WTI (+2.21%) and Brent (+1.64%) bounced. Meanwhile, much of the focus continues to be on the Dollar as the broader DXY weakened 1.36% for the largest daily decline since July 2013. There was a similar move versus the Euro too with the single currency rallying +1.51% versus the Dollar to $1.082, now nearly 4c off the intraday lows of 15th March.

It was a similar story in US Treasuries, with the benchmark 10y yield rebounding from the previous day’s weakness to close 3.8bps tighter at 1.93%. With a light data-calendar, there was some attention on the Fed’s Lockhart who reiterated his mid-year liftoff timing. Perhaps of more interest though, there was also some chatter from Lockhart around the strength of the Dollar after the Atlanta Fed President was quoted as saying on Reuters that ‘the impact of the strong Dollar first on softening the inflation numbers, and its effect in the first quarter on manufacturing activity, has gotten the attention of me and I believe my colleagues’. The comments were somewhat reinforced by the Chicago Fed’s Evans on Friday too, who commented that the stronger Dollar was one of the reasons why the Fed’s quarterly economic forecasts were cut, in particular as a result of some softening for net exports.

As mentioned earlier the Greek headlines, along with a rebound in oil helped the Stoxx 600 (+0.79%), DAX (+1.18%), CAC (+1.00%), FTSE MIB (+1.63%) and IBEX (+2.96%) all climb higher on Friday. Greek equities (+2.87%) also rallied. It was a similar story for government bond markets too as 10y Bund yields fell 0.3bps to 0.182% to mark a fresh record low. Peripheral yields continue to grind tighter with 10y Spain (-7.5bps), Italian (-5.1bps) and Portugal (-7.1bps) yields all taking a sharp leg lower. It was fairly quiet data wise meanwhile, with German PPI just a touch behind expectations (-2.1% vs. -2.0% expected).

Onto the early morning trading, with nothing in the way of data, bourses in Asia appear to be following the US lead and trading firmer as we go to print. The Nikkei (+0.96%), Hang Seng (+0.52%) and Shanghai Comp (+1.53%) are all higher. Credit markets are a couple of basis points firmer this morning too. Heading into the European open, the Dollar is more or less unchanged and oil markets have declined around 1%.

Moving onto the week ahead, it’s a quiet start to the week data-wise today in Europe with just the advance March consumer confidence reading for the Euro-area and CBI trends in the UK due. Talks between Germany’s Merkel and Greece’s Tsipras will likely be front and centre today however. Over in the US this afternoon we’ve got the Chicago Fed national activity index due along with existing home sales for February. The Fed’s Mester, Williams and Fischer are all due to speak too. The calendar picks up tomorrow with the preliminary March PMI’s due. We start in Asia with the manufacturing prints due in Japan and China while the conference board leading economic index is also due in the latter. In Europe the manufacturing, services and composite PMI’s are up for the Euro-area as well as regionally in France and Germany. Focus will also be on the UK where we get the February CPI/RPI/PPI readings. It’s busy in the US too tomorrow where attention will be on the all-important inflation readings discussed earlier. The manufacturing PMI will also be due along with new home sales, FHFA house price index and the Richmond Fed manufacturing index. We kick Wednesday off in Japan with PPI followed closely by consumer sentiment out of China. Confidence indicators highlight the data due in Europe with business and manufacturing confidence due in France along with the IFO survey due out of Germany. Attention across the Atlantic on Wednesday will be on US durable and capital goods orders for February while the Fed’s Evans is due to speak on economic and monetary policy. Thursday starts in Germany with the GFK consumer confidence reading before we get February money supply data for the Euro area and retail sales out of the UK. Over in the US on Thursday we get jobless claims data along with the preliminary March services and composite PMI’s before finishing with the Kansas City Fed manufacturing activity index. It’s a busy end to the week on Friday and we start in Japan with inflation data along with the jobless rate and retail sales. In the European timezone, meanwhile, we’ve got the import price index for Germany and Italian industrial orders and retail sales. We finish the week in the US with the third reading of the Q4 GDP print (consensus for +2.4% qoq annualized) as well as the University of Michigan consumer sentiment reading for March. The Fed’s Yellen speaking on monetary policy on Friday evening could also generate some headlines heading into next weekend.