The Troika flexes its muscle on the new Greek government
Late yesterday the ECB stated that it would no longer accept Greek debt as collateral for its refinancing operations, which meant the only thing preventing a run on bank deposits and the collapse of the Greek banking sector was an emergency liquidity assistance program backed by the ECB.
The basic investment thesis for 2015 was that the US economy would strengthen and force the US Fed to hike rates. Accordingly, the most crowded trade this year was long US dollar. The primary driver of expectations about US interest rates has been both the unambiguous guidance from the US Fed, and expectations that labour market tightness would spark higher wages and inflation. Interestingly, two things could spark a rethink of market expectations - firstly, lower oil prices are alleviating US (and global) inflation from the supply side, and secondly many overlook the fact that the US labour market recovery, whilst high in numbers, is low in quality. Indeed, two-thirds of US jobs created since the labour market trough in 2009 has been in occupations that pay less than USD20 per hour - which suggests that there may be less wages pressure from a tight labour market than traditionally has been the case. If tonight's non-farm payrolls fail to exhibit a rebound in hourly wages, then the US Fed could delay their tightening cycle. There are some signs that the US recovery is easing back with growth soft in the December quarter growth (albeit due to some 'one off' events) and the sales to inventory ratio from the ISM suggesting that US industrial production will slow in the March quarter, which will flow through to the US labour market in subsequent months. I don't think it is a co-incident that 13 regional central banks have pulled to policy lever over the past month as a US Fed pause will see the US dollar ease back and therefore these central banks need to cut rates to get their currencies lower (to support local growth), rather than rely on the US Fed doing to job for them. Indeed, recent central bank action seems all part of a co-ordinated attempt to provide additional stimulus to an anaemic global economic climate although it appears a stretch of faith for the global economy to respond to these rate reductions, after failing to so for the best part of six years. A lot hinges on tonight's report, and bad economic news will be good market news.
Asia - Asian markets closed lower in a relatively volatile trading session. The session started off well, but a hard line stance on Greek debt by the ECB late in the session was the catalyst for the rise in risk sentiment and dampened the impact of a -0.5% cut in China's reserves requirement ratio. Hong Kong and Shanghai-listed stocks surged at the open but quickly came off session highs as Europe weighed and rumours spread that China would reduce on-grid coal tariffs by -7%. The ECB decision was also drove increased capital flows into Japanese markets and pushed the Yen higher which weighed on Nippon share prices. Meanwhile, Japanese heavyweights reporting Q3 results, although these were not strong enough to reverse the impact of the higher Yen. By the regional close, the MSCI Asia Index was lower (-0.3%) with gains in Australia ( 0.6%) and Hong Kong ( 0.4%) outweighed by losses in India (-0.1%), Taiwan (-0.1%), Singapore (-0.3%), Japan (-0.5%), Korea (-0.5%) and China (-1.2%). In the local market the S&P/ASX 300 Index was 33 points ( 0.6% to 5,740 which is the highest level since May 2008) with gains led by financials ( 0.4%), telcos ( 1.1%) and IT ( 0.7%) partially offset by losses in utilities (-0.3%), materials (-0.8%) and energy (-2.0%).
Europe - European shares closed fractionally lower with Greek the prominent underperformer as the ECB and other Troika lenders took a hard line and stated that it would suspend accepting Greek bonds as collateral for refinancing loans for banks. This sent the Greek sharemarket down -9.4% at one stage as the price of Greek banks buckled under funding pressure, although losses eased coming into the close. Meanwhile, corporate updates distracted investors with some positive earnings reports in the auto sector from Daimler and Nokian Renkaat and some additional M&A updates although these were limited to small cap stocks. Meanwhile, there was little macro data out of note which seem to keep most bourses in a holding pattern. By the regional close, the EuroStoxx Index was lower (-0.1%) with gains in energy ( 1.6%) and materials ( 1.4%) offset by losses in healthcare (-0.1%), banks (-0.5%) utilities (-0.8%). In the major markets, movements were modest with slight advances in the UK ( 0.1%) and France ( 0.1%), whereas Germany moderated a touch (-0.1%). In the periphery markets performance was more downbeat as stresses in Greece meant investors sought perceived safe havens amid losses in Greece (-3.4%), Italy (-0.6%), Spain (-0.4%) Ireland (-0.1%) and Portugal (-0.03%).
US - on Wall Street with around 60 minutes left to trade US equities are trading higher as a rebound in global energy prices, some positive US macro data releases and some large M&A deals buoyed investors. Indeed, Pfizer announced a USD90 all cash offer to purchase Hospira ( 35.6%) which send the bulls into a frenzy and the positive sentiment was reinforced by a positive weekly US initial jobless claims which came in below expectations at 278k and sparked increased optimism about tonight's non-farm payrolls. Within the last hour of trading, the Dow Jones Industrial Average is up 164 points ( 0.9% to 17,837) with the S&P 500 ( 0.8% to 2,059) and the NASDAQ ( 0.8% to 4,752) posting similar results with all sectors in positive territory led by materials ( 2.4%), healthcare ( 1.5%) and energy ( 1.2%).
Australia/Asia - December Australian retail sales came in below expectations ( 0.2% m/m relative to street estimates of 0.3% m/m), with ex-food sales contracting by -0.2% over the past two months. However, the data indicates that retailers are discounting hard to spark sales and this is likely to support the December quarter national accounts which are going to need all the help it can muster. The discounting highlights the fragile state of consumer confidence which is beginning to impact spending decisions, although this may be offset by lower oil prices and an RBA rate cut which should lifted disposable income by around 1% over the next 12 months.
Europe - The Bank of England left policy rates unchanged at 0.5% with their QE program also steady at £375 billion. Meanwhile, German factory orders came in above expectations in December ( 4.2% m/m relative to consensus of 1.5% m/m and the November reading of -2.4% m/m), which suggests that Europe's largest economy is beginning to get off its knees and move into expansion territory. Meanwhile, the Danish Central Bank continued to struggle to hold its peg against the Euro and cut its deposit rate by -0.25% to -0.75%, which is the third policy change in four weeks and suggests that they, like Switzerland, may have to abandon this policy before too long.
US - Weekly US Jobless Claims came in at 278k for the period ending 31-Jan 2015, which was below consensus ( 290K), but above an upwardly revised 267K in the prior week. Meanwhile, the December US trade deficit was larger than expected (-USD46.6 billion relative to street estimates of -USD38.0 billion with the November result also revised high).
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