Squeeze into Greek vote continues

by: Keira Kirk on: June 29, 2011

Fear ahead of the Greek parliamentary vote is yielding to euphoria as markets are embracing the French solution. Beneath the surface, other evidence points to less confidence, however. Is this just a squeeze? Many indicators are pointing toward the belief that the Greek parliament will vote in favor of the new austerity package – Euro crosses are squeezing higher, risk appetite has bounced hard, and interest rate expectations for the ECB As our chief economist discusses in Steen’s Chronicle today, however, (and to paraphrase) the market is focusing once again on the vein pattern in a single leaf rather than contemplating the backdrop of the Eurozone forest. Yes, liquidity is likely to ride to the rescue once again as we get a “Greek squeak” of a vote in the parliament and the “French solution” with its decidedly baroque intricacy. But solvency is still the open issue. In other words – any reaction to a “successful” Greek bailout will more than likely prove . And this time around, as Steen points out, the EuroZone stress is unfolding in an environment of powerful economic deceleration in all of the major economic regions, rather than one of relative economic strength, as was the case around this time last year. Besides, a few other indicators are a bit less supportive of the renewed crumbling of the US dollar – particularly from an interest rate spread perspective, where the US currency appears to be holding its own. It’s tough to tell how much of the action is a simple squeeze on those positioned negatively against risk and the Euro as we head into the Greek vote today and how much of the trade represents concern related to how the USD will fare as QE2 ends (and the 2nd quarter, by the way) tomorrow. US Treasury Auction trips the JPY The terrible US 5-year treasury auction result yesterday – so suddenly weak after the spate of very strong auctions ahead of Thursday’s end of QE2 – saw yields sharply higher in the US after the longest string of weekly yield drops in years. In fact, the move higher has been so sharp that the 5-year, for example, has regains almost all of the yield that it lost earlier this month in a mere three days. This auction is particularly interesting as the five-year is at the middle part of the curve where the Fed was focusing the majority of its bond buying during QE2. Tomorrow will see an auction of 7-year notes on the very last day of the QE2 regime.  The next 3-year, 10-year and 30-year auctions, the first post QE2 auctions of longer maturity, are set to take place July 12-14. Chart: EURJPY EURJPY has rallied furiously on the combination of high expectations on the Greek bailout moving forward and on the sharp rise in world bond yields due to the weak US treasury auction yesterday. This has pushed EURJPY all the way back to the 117.00 area after it survived a test of the key 200-day moving average in recent days. On the upside, the 55-day moving average was also challenged on the day – an MA that was important back in late May / early June. Note as well the magnetism of the Ichimoku daily cloud. Canada inflation Canada’s May CPI data came out much higher than expected, with the core inflation rising to the highest level for a year on year comparison since October of last year and the headline at the highest since 2003. This saw rate expectations jumping again and the USDCAD consolidation turning into a rout as forward rate expectations  jumped as much as 10 bps before easing back a bit. The BoC has been reluctant to hint at any real desire to raise rates, but this data and the resurgence in crude oil prices on stronger risk appetite and despite the recent release of strategic oil stockpiles has CAD pulling stronger on the day. USDCAD’s recent rejection of the rally took place right at the 200-day moving average around 0.9900 and now the pair is already close to testing the downside support – the four or five times tested 55-day moving average now residing just below 0.9700. Looking ahead The actual timing of the Greek vote (widely expected to squeak past) is rather uncertain, though it is expected sometime this morning. There are still potential stumbling blocks out there for the bailout process, not the least of which is the German Constitutional Court’s look at the constitutionality of the Greek bailout and bailouts in general on July 5. To repeat our background view here: the primary risk is not in the bailout particulars – if this Greek package is pushed through it could put a lid on the debt situation for quite some time according to the numbers – but popular dissent and social unrest don’t work “by the numbers” and therein lies the risk  - just as there is the constant background threat of a political risk feeding off popular unrest in Greece as well as in the bailout-weary voting populations elsewhere in Europe. Meanwhile, as Steen points out in his chronicle today – a Greek bailout doesn’t solve Italian and Spanish sovereign debt issues that appear to be mounting as well. General bailout fatigue is still a significant risk for the EuroZone. As If it isn’t enough, we’ve got the expiration of QE2 and the end of the quarter tomorrow as well, both of which are potentially critical pivot points for markets. Contrary to our idea from Monday that the market might suffer until late this week as it fretted things, instead we have seen a real squeeze on the risk bears before the events themselves have come to pass. Will a Greek vote and the end of QE2 touch off a nasty reversal or an add-on euphoric rally? It seems to be an either/or setup. On the economic calendar front, we’ve got the US weekly jobless claims and US June Chicago PMI tomorrow and the ISM Manufacturing on Friday. Also tomorrow we have the German June unemployment change tomorrow (been trending the wrong way for the last couple of months), Canada’s April GDP and in the Asian Friday session, a rash of Japanese data, including the latest inflation and Tankan survey.   Economic Data Highlights

  • Japan May Industrial Production rose +5.7% MoM and fell -5.9% YoY vs. +5.5%/-6.3% expected, respectively and vs. -13.6% YoY in Apr.
  • China May Leading Index out at 101.98 vs. 102.02 in Apr.
  • UK Apr. Index of Services fell -1.2% MoM vs. +0.8% in Mar.
  • UK May Mortgage Approvals out at 45.9k vs. 46.3k expected and 45.4k in Apr.
  • EuroZone Jun. Economic Confidence out at 105.1 vs. 105.0 expected and 105.5 in May
  • EuroZone Jun. Industrial Confidence out at 3.2 vs. 3.5 expected and 3.8 in May
  • EuroZone Jun. Services Confidence out at 9.9 vs. 9.0 expected and 9.3 in May
  • Switzerland Jun. KOF Swiss Leading Indicator out at 2.23 as expected and vs. 2.30 in May
  • Canada May Consumer Price Index out at +0.7% MoM and +3.7% YoY vs. +0.3%/+3.3% expected, respectively and vs. 3.3% YoY in Apr.
  • Canada May CPI Core out at +0.5% MoM and +1.8% YoY vs. +0.2%/+1.5% expected, respectively and vs. +1.6% YoY in Apr.
  • Canada Apr. Teranet/National Bank Home Price Index out at +1.1% MoM and +4.4% YoY vs. +0.8%/+3.9% expected, respectively and vs. +4.1% YoY in Mar.

Upcoming Economic Calendar Highlights (all times GMT)

  • US May Pending Home Sales (1400)
  • US Weekly DoE Crude Oil and Product Inventories (1430)
  • New Zealand May Building Permits (2245)
  • UK GfK Consumer Confidence Survey (2301)
  • Japan Jun. Markit/JMMA Manufacturing PMI (2315)
  • Australia May RPData-RiskMark House Price Index (0030)
  • New Zealand Jun. NBNZ Business Confidence (0100)
  • Japan May Housing Starts (0500)

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