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With Greece Swept Under The Rug, Focus Turns To Janet Yellen's Congressional Testimony

There was an expectation that today's receipt by the Troika of the revised Greek "reform proposal" would send risk and the EUR higher, which is probably precisely why nothing has happened so far, and US equity futures are unchanged ahead of what the HFT algos' new attention focus is today, namely Yellen's semi-annual testimony to Congress. As a result, the only thing that has seen notable strength this morning is the USD, which has surged to 119.50 against the Yen, and briefly pushed the EURUSD under 1.1300. which also means that WTI has also gone nowhere overnight and remains under $50. One wonders just what OPEC "rumor" those long crude will leak today.

Asian equities traded mixed following a lacklustre Wall Street close as participants await details on Greece’s reforms after missing yesterday’s deadline. Nikkei 225 (+0.74%) outperformed underpinned by a weak JPY while the ASX 200 (+0.2%) rose, led by basic materials in the wake of better than expected earnings from BHP Billiton (+2.5%). Hang Seng (-0.6%) fell for a 2nd day dragged lower by HSBC (-3.3%) after the Co.’s pre-tax profit fell by 56%. JGBs gained 9 ticks, as the long-end outperformed once again, supported by month-end durations adjustments and today’s well received 40yr auction.

European equities traded mostly lower albeit modestly so in what has been a relatively light session thus far from a macro perspective. In terms of the latest developments for Greece, according to an EU source, the EU Commission is said to believe that the list submitted by Greece is sufficient enough to be a good starting point to move forward. This positive sentiment has subsequently filtered through to Greek assets with the ASE higher by 6.5% and Greek 3yr yield lower by 116bps at the time of writing. Elsewhere, European participants now await Fed Yellen’s semi-annual testimony at 1500GMT, while on a sector specific basis for Europe, telecom names lead the way lower after Vodafone were downgraded at BofAML. Bunds also trade modestly lower this morning, although volumes are particularly light ahead of upcoming key risk events.

In FX markets, antipodeans slumped overnight led by NZD in the wake of tame New Zealand inflation data (Q1 2yr Inflation Expectation 1.80% vs. Prev. 2.06%), with AUD also on the back foot in sympathy. Consequently, NZD/USD and AUD/USD broke key technical levels at 0.7500 and 0.7800, with losses in AUD/USD stemmed by the 0.7750 long-term support level. Elsewhere, GBP has been supported by comments from BoE’s Forbes who said gradual increases in interest rates should support the economy in the UK, adding that low inflation present at the moment will fade quickly. These comments subsequently saw EUR/GBP print a fresh 7yr low, while GBP/USD pared its gains as a result of the broadly stronger USD, alongside the move higher in US yields and USD/JPY breaking above 119.42; the high seen on 17th and 18th Feb. Also from a UK perspective, today saw BoE’s Carney testify at the Treasury Select Committee hearing but these comments were a reiteration of the February QIR. Furthermore, BoE’s Weale was also on the wires saying the BoE may have to lift rates before the timeframe which markets are currently expecting, this saw a brief spell of upside in GBP/USD before being pared as these comments were largely a reiteration of MPC member comments over the past few weeks.

In commodities markets, WTI crude futures have held below USD 50/bbl overnight after yesterday’s sharp-sell off, ahead of today’s weekly API crude oil inventory report, with the stronger USD also weighing on prices. In metals markets, despite spot gold initially holding on to yesterday’s gains amid dampened risk sentiment in the US, prices have now ebbed lower alongside movements in the USD. Elsewhere, Copper prices saw a mild decline overnight with the world’s largest buyer China still away for holidays and LME inventories rising to its highest in over a year of 299,675 tonnes.


Bulletin Headline Summary from Bloomberg and RanSquawk

  • The Greek reform proposal has now been formally received with EU sources suggesting the list is sufficient enough to be a good starting point to move forward
  • The stronger USD is dictating a bulk of the price action so far while EUR/GBP hit a 7yr low following hawkish comments from BoE’s Forbes
  • Elsewhere, European participants sit on the sidelines ahead of Fed Yellen’s Semi-Annual Testimony at 1500GMT. A full preview of the event can be viewed here
  • Treasuries decline before week’s auctions begin with $26b 2Y notes; WI yield 0.645% vs 0.54% in January, 0.703% in Dec.; Yellen due to begin testimony before U.S. Senate Banking Committee at 10am ET.
  • Greece moved closer to winning an extension of financial aid after the head of the group of euro-region finance ministers said creditors were favorable toward the government’s package of new economic measures
  • Bank of England Governor Mark Carney said policy makers can look beyond the current bout of weak inflation as he pledged to return price growth to target “within a reasonable horizon”
  • The U.S. Justice Department is investigating whether the world’s biggest banks manipulated prices of precious metals such as silver and gold, according to people with knowledge of the matter
  • Rebel groups said they are withdrawing heavy weapons from the conflict zone in eastern Ukraine as the foreign ministers of France, Germany, Russia and Ukraine gather in Paris to discuss the cease-fire agreement
  • U.S. Senate Majority Leader Mitch McConnell proposed legislation that separates the immigration issue from funding for Department of Homeland Security after the Senate failed again to advance a House-passed bill that linked the two matters
  • Sovereign 10Y yields mixed. Asian stocks gain, European stocks mixed; U.S. equity-index futures steady. Crude and copper higher, gold declines

US Event Calendar

  • 9:00am: S&P/Case Shiller 20 City m/m SA, Dec., est. 0.6% (prior 0.74%)
    • S&P/CS 20 City y/y, Dec., est. 4.3% (prior 4.31%)
    • S&P/CS 20 City NSA, Dec., est. 172.70 (prior 172.94)
    • S&P/CS U.S. HPI m/m, Dec. (prior 0.76%)
    • S&P/CS U.S. HPI y/y, Dec. (prior 4.69%)
    • S&P/CS U.S. HPI NSA, Dec. (prior 167)
    • Markit US Composite PMI, Feb. preliminary (prior 54.4)
  • 10:00am: Consumer Confidence Index, Feb., est. 99.5 (prior 102.9)
  • 10:00am: Richmond Fed Mfg Index, Feb., est. 6 (prior 6)

Central Banks

  • 9:00am: ECB’s Draghi speaks in Frankfurt
  • 10:00am: Fed’s Yellen testifies to Senate committee
  • 1:45pm: Bank of Canada’s Poloz speaks in London, Ontario
  • 1:00pm: U.S. to sell $26b 2Y notes

DB's Jim Reid concludes the overnight summary

The first (and main market moving) part of Yellen's semi-annual testimony starts today at 10am EST / 3pm London and is to the Senate Banking Committee. Given the February reversal in US rates, which has seen the 10yr rise a little under 50bps in less than a month, it will be interesting to see whether Yellen alters the message much from that in the January FOMC minutes which were read as being broadly dovish. On a call yesterday, DB’s Peter Hooper argued that whilst Yellen may not vary too much from the recent minutes she may be slightly more hawkish, possibly attempting to downgrade the significance of the FOMC’s word of the moment - ‚patience? – without directly modifying it, possibly with an eye towards a more meaningful change in March. This view doesn’t seem too far off the consensus in the market with the general bias being towards expecting a slightly more hawkish Yellen then we have seen on previous outings.

We're not quite so sure she'll lean towards a more hawkish bent. Obviously the most recent strong employment report gets a lot of attention but the reality is that it’s been a disappointing year for US data so far. Positive economic surprises are currently running at the lowest levels since the middle of 2012 which isn't getting much focus at the moment. Maybe bad weather is being used as a factor. Also yesterday saw yet another surprise central bank easing as the Bank of Israel cut rates from 0.25% to 0.1%. This brings our tally of countries easing in 2015 to 40 (including 19 under the ECB). Indeed we think at least 10 of these were a surprise and although the ECB wasn't a surprise you can say that they went beyond what the market was expecting. Surely these international moves have to influence the Fed? In a beggar thy neighbour world they are likely to find it difficult to act in the same way as they planned without conceding ground in the global currency war. So one could argue that doing nothing is slightly tightening policy relative to many other regions. Anyway all eyes on Mrs Yellen today.

Turning our attention to Greece now, it was actually a fairly quiet day yesterday with the notable news being that Greece is now expected to present a list of reform measures to the Eurogroup this morning after an initial draft shown last night to the IMF, ECB and European Commission. The proposals are expected to be assessed by finance ministers today so we should start to see headlines as the day goes on. The general rhetoric from Dutch finance minister Dijsselbloem was encouraging after he was quoted as saying on Bloomberg that ‘I am very confident’ and that the ‘Greek government has been very serious, working very hard the last couple days’. An FT article noted a Greek government official as saying that the measures will include raising revenues through ‘more progressive taxes and crackdowns on tax fraud and smuggling’ however the submission could keep the government’s promise to spend €1.9bn on social services payments as well as taxpayer relief measures. Although approval of the measures would be a welcome and positive step forward, the detailed and likely more debated negotiations – for which Greece has been set an end of April deadline – will then only just begin.

Markets in Europe yesterday played catch-up to the better news on Friday night around Greece with equity markets closing higher. Indeed, the Stoxx 600 (+0.74%), DAX (+0.73%) and CAC (+0.65%) all finished firmer. There was a better sentiment in peripheral government bond markets too. 10y yields in Spain (-8.1bps), Italy (-8.1bps) and Portugal (-9.1bps) all tightened. In fact 10y Portugal sovereign bonds briefly joined Spain and Italy as trading tighter than equivalent maturity US Treasuries, before closing just wider after Treasuries rallied in the US session. Elsewhere equity markets in Greece were closed for a public holiday, however both 3y (-191bps) and 10y (-65bps) yields finished tighter.

In terms of data yesterday, German IFO prints disappointed relative to expectations but continued to trend positively. The IFO business climate print for February of 106.8, was up a touch higher from January (106.7) but came in short of the 107.7 expected. The reading was, however, the fourth consecutive monthly increase. Meanwhile the expectations print of 102.5 also came in below expectations (103.0), but again rose from 102.0 previously whilst the current assessment print declined 0.4pts to 111.3 (vs. 112.5 expected). Our colleagues in Europe noted that that at these levels, the IFO expectations is pointing towards a +0.5% qoq GDP growth in Q1 whilst the composite PMI points to +0.4% - both of which is an upside risk to their +0.3% forecast.

Ahead of Yellen’s speech today, equity markets in the US yesterday were relatively subdued with the S&P 500 more or less unchanged (-0.03%). There was a more notable bid for Treasuries however as the 10y benchmark yield tightened 5.4bps to close at 2.057%. A weaker day for macro data perhaps supported the move. The Chicago Fed National activity index rose to 0.13 in January, however was slightly behind expectations of 0.15. Existing home sales disappointed. The -4.9% mom print was weaker than the -1.8% expected and the annualized 4.82m rate was the lowest since April 2014. Finally the Dallas Fed manufacturing activity index declined sharply to -11.2 in February from -4.4 in January. The print was in fact the lowest since April 2013. Finally comments out of the Fed’s Lacker lent further support to the hawks yesterday. Lacker was noted as saying that the FOMC could raise rates in April or June regardless of whether or not it keeps the ‘patience’ language as well as saying that the ‘statement is well enough qualified that we’d have flexibility to move’.

Just wrapping up the rest of the market moves yesterday, oil markets declined as WTI (-2.68%) and Brent (-2.19%) both fell. The decline for WTI to $49.45/bbl in fact marked the fourth consecutive down day falling nearly $5 from the recent highs. Oil did however spike around 2.5% off the intraday lows at one point, before quickly giving up those gains again, after reports on the FT quoting the Nigerian oil minister as saying that OPEC have discussed holding an emergency meeting in the face of declining prices. A report published later on Bloomberg however downplayed the comments saying that there had been no such discussions and that a meeting would require approval from all 12 members.

Quickly refreshing our screens this morning, bourses in Asia this morning are largely trading firmer as we go to print. The Nikkei (+0.52%), Kospi (+0.38%) and ASX (+0.32%) are all higher whilst the Hang Seng (-0.58%) has weakened. Credit markets this morning in Asia are largely unchanged.

Away from the obvious focus on Greece and Yellen today, attention this morning will be on Germany where we get the Q4 GDP print and also on the Euro-area where we get the final CPI reading. As well as this, focus will also be on France where we get confidence indicators with both the business and manufacturing prints. Over in the US this afternoon we get the S&P/Case-Shiller house price index along with the services PMI, consumer confidence and Richmond Fed manufacturing index. So a busy day ahead and one where I just might have to stay late to bring myself up to speed with the action!!!