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Stocks Coiled In Anticipation Of Today's Eurogroup Meeting

The only question on traders' minds today, with the lack of any macro news out of the US (except for the DOE crude oil inventory update at 10:30am Eastern expecting a build of 3.5MM, down from 6.33MM last week, and the 10 Year bond auction at 1pm) is which Greek trip abroad is more important: that of FinMin Varoufakis to Belgium where he will enter the lion's den of Eurogroup finance ministers at 3:30pm GMT, or that of the foreign minister Kotzias who has already arrived in Moscow, and where we already got such blockbuster statements as:

  • LAVROV: RUSSIA WILL CONSIDER AID REQUESTS, IF GREECE MAKES THEM
  • KOTZIAS: GREECE IS WILLING TO MEDIATE BETWEEN EU, RUSSIA

Or perhaps both are critical, as what happens in Brussels will surely impact the outcome of the Greek trip to Russia?

In any case, flashing red headlines - both factual and trial balloony - today will be fast and furious, with many kneejerk responses, and with the "market" reaction most likely to be the opposite of the expected, logical one as the ECB and SNB both intervene fast and furiously to make sure Greece doesn't get any ideas and become emboldened to demand even more should risk sell off on any increase to its hard line negotiating stance.

Although Greek asset have seen some slight selling since the open and the National Bank of Greece trades as the worst performing stock in Europe, this has failed to fully carry over into the core and the DAX trades flat with no standout out-or-underperforming names in the index to drive firm direction.

The GR/GE 10y yield spread sits wider by over 30bps on the day at just under 1000bps as the ASE trades lower by 3.5%. Impending supply of EUR 5bln from Germany weighed on bunds at the Eurex open ahead of Germany hitting the market with the equivalent 24K 2y Schatz futures with their zero coupon 2y again expected to receive a cool reception. The UK tapped the market with a 30y and the US are due later on today with their benchmark 10y note (266K Mar 10y futures equiv). But perhaps the most notable developments in fixed income was that both Germany and Sweden (for the first time ever) sold paper with negative yields earlier today, getting negative 22 bps for 2 year and 5.03 bps for 4 year paper, respectively. In the meantime, someone continues to hit the sell button with clockwork precision on the Treasury long-end, just because suddenly US paper has become as hated to central bankers as gold.

For the time being, the EUR/USD was seen drifting lower (with the USDJPY rising) in early trade as most algos expect to see "worse than expected" headlines out of Brussels and are pricing it in. The pair has traded in a range of just under 30 pips and inbetween yesterday’s low of 1.1274 and high of 1.1355 despite some weakness in EUR against other major currencies.

A slide in the EUR/GBP cross to lows last seen in Jan 2008 has helped support a bid in GBP/USD and short-covering ahead of tomorrow’s BOE inflation report is helping to lift the pair in quiet conditions. The prospect of a slightly more hawkish report from the BoE tomorrow has also led to a slight climb in UK rates with the short sterling strip trading heavy relative to its peers. Conversely CAD continues to weaken this morning as oil prices slide, exacerbated by a break back below USD 50 in WTI crude futures, and once again this morning the CHF has seen choppy trade as the EUR/CHF cross sits near 1.0500.

Asian equity markets traded mixed after failing to take the impetus from a strong Wall Street (S&P 500 +1.1%) close ahead of the Greek and Eurogroup talks today. ASX 200 (-0.7%) was dragged lower by energy and health sectors amid yesterday’s fall in oil and poor earnings from CSL (-7%), Australia’s largest pharmaceutical. Hang Seng (-0.8%) tumbled with the Shanghai Comp (+0.6%) swinging between gains and losses amid dampened expectations of further PBoC easing. As a reminder, markets in Japan were closed today for the National Foundation Day holiday so markets were relatively quiet throughout the overnight session.

Bulletin Headline Summary From RanSquawk and Bloomberg

  • Markets drift as all await the arrival of the Greek finance minister in Brussels for today’s Eurogroup meeting where Greece are expected to push to negotiate a loan agreement but reject an extension of their current bailout program
  • Today’s Eurogroup timeline: 1530GMT All Arrivals, 1730GMT Roundtable, 1900GMT Press Conference
  • Treasuries steady before quarterly refunding continues with $24b 10Y notes; WI bid yield 1.995% vs 1.93% award in January.
  • Germany and Greece drew battle lines ahead of an emergency meeting of official creditors today, with German Finance Minister Schaeuble saying there are no plans to discuss a new accord or give the country more time
  • Greek Finance Minister Varoufakis says in interview with Stern magazine that “Greek debt cannot be repaid in the near future” and that Europe suffers from a “deficit of democracy”
  • Germany sold 2Y notes with a more-negative yield than the ECB’s deposit rate as investors chose to forfeit more cash to own the securities than banks pay to park funds with the central bank
  • Denmark rejected all bids in a Treasury-bill auction today as policy makers struggle to stop investors from hoarding kroner in an effort to save the country’s euro peg
  • Sweden sold SEK3.5b 2019 bonds at -0.0503%, drawing a negative yield for first time on record; bid-to-cover 3.21 vs 2.71 at April 23 auction
  • BOJ’s Kuroda said G-20 nations didn’t criticize his monetary policy or discuss the yen’s weakening, signaling confidence to proceed with easing that has driven down the currency
  • China’s monetary policy has room for easing as financing difficulties and high funding costs remain, according to a commentary published on China Securities Journal’s front page, written by reporter Gu Xin
  • Russia indicated Putin will attend talks in Minsk to negotiate a cease-fire in Ukraine and that a deal is likely, as officials wrangle over the degree of autonomy to give rebel- held eastern regions after 10 months of fighting
  • Top Democrats remained skeptical of a White House plan for using force against Islamic State extremists, saying the Obama administration is going too far in seeking the right to send ground troops on certain missions
  • Sovereign yields mostly lower; Greece 10Y surges ~40bps. Asian stocks mostly higher, Tokyo closed for holiday; European stocks, U.S. equity-index futures mixed. Brent and WTI lower, with latter trading below $50/bbl; gold little changed, copper higher

US Event Calendar

  • 7:00am: MBA Mortgage Applications, Feb. 6 (prior 1.3%)
  • 2:00pm: Budget Statement, Jan., est. -$19b (prior -$10.250b) Central Banks
  • 8:00am: Fed’s Fisher speaks in New York Supply
  • 1:00pm: U.S. to sell $24b 10Y notes in quarterly refunding

* * *

DB's Jim Reid concludes the overnight recap

Despite optimism yesterday of a move towards a deal for Greece, ahead of the much anticipated emergency Eurogroup meeting today, it doesn't feel anywhere near close enough to one minute to midnight for us to see resolution yet. It also doesn't feel markets are stressed enough to focus minds at this point. It seems to us there needs to be a bit more tension before any agreements can be made if indeed they eventually are.

Greek equities rebounded nearly 8% yesterday and 3y government bond yields pared back some of Monday’s weakness to tighten over 150bps by the close. Yesterday saw a constant stream of headlines ahead of today’s main event. Initial reports out of MNI reported that the European Commission would ‘table a compromise at the emergency Eurogroup meeting’ and that the proposal would be expected to be the platform for discussions. The report was quickly downplayed however with Reuters reporting that there is no such plan from the EC’s Juncker at this stage although ‘very intense contacts are going on between the President, Prime Minister Tsipras and other players’. The same article also quoted the EC’s Moscovici as saying that ‘they know the program is our reference and framework and we have to see what kind of solutions we can decide inside this framework’. Meanwhile the Guardian reported that Greek finance minister Varoufakis could pledge to implement around 70% of the existing bailout package and negotiate the remaining 30% around new measures.

It was comments towards the end of day however that have caught our attention. Appearing to take a much tougher stance than his European counterparts, German finance minister Schaeuble commented at the G20 that ‘it’s over’ for Greece should they refuse the final tranche of the current aid package and that Greece’s creditors ‘can’t negotiate about something new’ according to Bloomberg. In the same article the Bundesbank’s Weidmann meanwhile noted that any sort of bridge facility must be built by fiscal policy given that it’s forbidden for monetary policy to finance states. Specifically Weidman said that ‘the question of a bridge loan via T-bills has a precondition, in my view, that it’s not a bridge to nowhere’. Finally, late last night we also learned that Greece’s new government had received a vote of confidence ahead of today’s meeting. In a similarly defiant speech to Sunday, Tsipras continued his adamant stance, saying that he is optimistic the EU will accept Greek proposals and that the Greek government will not ask for a bailout extension. He was quoted in Reuters specifically as saying that ‘we are not negotiating the bailout; it was cancelled by its own failure’. Attention now turns to today’s Eurogroup meeting which is due to kick off at 4.30pm GMT and where we should hear something in the evening.

In terms of the early reaction in Asia this morning, markets are mixed with the Hang Seng (-0.79%) and ASX (-0.54%) lower whilst the Shanghai Composite (+0.14%) is firmer – although the latter perhaps still buoyed by hopes that the yesterday’s weak inflation print will help fuel stimulus measures. Gold (+0.38%) is also firmer this morning. The Euro is more or less unchanged at $1.132.

As well as Greece, focus today will also be on the Russia talks where hope is resting on a ceasefire agreement being announced in a meeting today between Ukrainian PM Poroshenko, German Chancellor Merkel, French President Hollande and Russian President Putin. A Russian ETF rallied late last night in the US session after news that Obama had spoken to Putin yesterday urging him to seize the opportunity this week to seek some sort of diplomatic resolution. US Treasury Secretary Lew was also noted yesterday as saying ‘its critically important that the international package comes together quickly’ and that encouragingly ‘there’s been progress in the last few days’.

Back to markets, in the US the S&P 500 (+1.07%) finished more or less at its highs for the day to take the index back into positive territory YTD. Energy stocks (-0.19%) were weaker as oil markets reversed some of the recent gains whilst Halliburton reported that it’s looking to cut as much as 8% of its workforce, following in the footsteps of recent energy company announcements. WTI (-5.37%) and Brent (-3.27%) dropped after reports out of the IEA that US production will still remain at high levels over the next five years. Yesterday’s results out of Coca-Cola also appeared to support the better sentiment. In fact earnings season on the whole has been supportive for equity markets, with Bloomberg reporting that of the two-thirds of S&P 500 companies to have reported so far, 77% have beaten profit estimates and 56% have beaten sales forecasts. Amazingly, Apple yesterday also became the first company to close with a market valuation greater than $700bn. At $711bn, Apple’s market cap is now over $300bn more than the next most valuable US company Exxon Mobil.

Treasuries closed wider yesterday with the 10y benchmark yield finishing +1.9bps at 1.997% following further encouraging employment data. The JOLTS job openings report for December showed the US creating 5.03m jobs, up from 4.85m previously and ahead of expectations (4.98m). The print was in fact the highest since January 2001. Bolstering the case for a June rate hike, the San Francisco Fed President Williams (FT) said that the time for the Fed to start raising rates is getting ‘closer and closer’ whilst elsewhere the Fed’s Lacker said that ‘at this point, I think June looks like the attractive option’. Wrapping up the data, wholesale inventories (+0.1% mom vs. +0.2% expected) and sales (-0.4% mom vs. -0.3% expected) for December printed more or less in line, although there were softer than expected readings out of the NFIB small business optimism survey for January (97.9 vs. 101 expected) and IBD/TIPP economic optimism survey (47.5 vs. 51.9) for February.

With markets hopeful of a more favorable outcome today following yesterday’s earlier headlines, risk assets in Europe firmed with the Stoxx 600 finishing +0.64 and the DAX closing +0.85% better. Crossover too finished 9bps tighter. The Euro meanwhile swung around with the various headlines, only to end the day more or less unchanged at $1.132. With the better tone generally, government bond markets in Europe finished weaker. 10y yields in Germany (+1.5bps), Spain (+4.9bps) and Italy (1.4bps) all weakened. It was a quiet day data wise. France posted a better than expected industrial (-0.1% yoy vs. -1.3% expected) and manufacturing production (+0.3% vs. -0.8% expected) print whilst in the UK, industrial production was in line at +0.5% yoy and manufacturing production came in above consensus (+2.4% yoy vs. +2.0% expected).

Away from the Eurogroup meeting and Russian talks it’s a quiet macro calendar today in Europe with just inflation data due out of Portugal although the ECB’s Coeure is due to speak. It’s a similar picture in the US with just the monthly budget statement due up. Fedpseak continues with Fisher due to speak in New York this afternoon.