Will the Greek austerity ‘haircut’ appease the market?

Is it enough? Thus far, the proverbial handshake agreement has Greece committed to cutting its budget deficit to +8.7% of GDP this year from +12.7% last year. Will Capital Markets be reassured about Greece potential $6b ‘austerity haircut’ announced this morning? Will the ‘new precise measures’ appease consumer confidence. No matter what, expect future civil servants strikes to paint the landscape for the longer term investor. It’s a token gesture for the EU as Papandreou prepares to meet Merkel on Friday and Sarkozy next week. They have a Mar. 16th deadline imposed by the EU to table their ‘plan’. Thus far this morning, a relief rally has been flat or perhaps we have seen the EUR’s lows printed yesterday.

The US$ is slightly weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies in a ‘subdued’ trading range.

There was nothing of consequence in US data yesterday as we wait for the private ‘employment’ reports this morning. The market has been trying to keep it well contained ahead of tomorrows ECB and BOE rate announcements and Fridays NFP report. Even the chance of a potential M&A EUR deal happening ($4b-Pfizer and Ratiopharm) is doing little to ruffle the feather this morning.

Are we not confused enough that the have to decipher mixed messaging from Fed rhetoric on US monetary policy? Fed’s Hoenig said that the Cbanks commitment to keep interest rates low for an extended period of time could ‘invite speculation’ in the financial markets. On the flip side, Fisher said ‘that while liquidity measures were slowly being unwound, the time was not yet right to begin tightening monetary policy’. Who is being irresponsible now?

The USD$ is currently is lower against the EUR +0.14%, GBP +0.34%, CHF +0.16% and JPY +0.05%. The commodity currencies are mixed this morning, CAD +0.15% and AUD -0.03%. The BOC did not disappoint, in fact they made it an interesting morning in trading the loonie yesterday. In a nut shell, they are behind the curve. Their following communiqué was hawkish in nature, leading to somewhat predictable rate increases for the second-half of this year. The BOC said that ‘inflation and economic output have been higher than policy makers expected’. But, also repeated to stand pat through June unless the ‘current inflation outlook shifts’. Why not hike now? The market it seems is beginning to price in an earlier hike. Their statement omitted an earlier inflation risk reference, that being ‘tilted slightly to the downside’. It also omitted a reference to having ‘flexibility’ even with the key interest rate close to zero. Canada’s annual inflation rate was +1.9% in Jan. (fastest pace in 12-months) and the core rate (ex-food and energy) at +2%. Governor Carneys rhetoric justifies the bull’s positions and has certainly caught some technical positions flatfooted. With North American employment data this Friday one should expect unwinding of some of these gains with speculators looking to buy CAD on any USD rallies.

It seems after last nights Aussi data the RBA’s actions have been ‘spot on’ this week. Stronger growth numbers (GDP, q/q, +0.9% vs. +0.3%) pushed the AUD to print a weekly high vs. the greenback. Earlier this week as expected, the RBA hiked rates, very much telegraphing the decision, by +25bp to +4%. Governor Stevens said ‘rates should be closer to average’, which policy makers have indicated may be 75bp higher than the current +4%. He also went on to say that the decision ‘indicated the economic figures outweighed concerns about global sovereign debt risks, which helped convince the RBA to stand pat last month’. The currency has advanced +42% vs. the USD in the past year, making it the best performer among the most-traded currencies. Analysts believe that the ‘the biggest jobs boom in more than 3-years and a surge in business confidence suggest Australia’s economy is already growing at or close to trend, after escaping recession during the global crisis’. Reading between the lines, we should expect the RBA to hike with a ‘gradual approach’. If investors concerns ease over Greece’s ability to finance its debt then expect better buying on pull backs by the market (0.9020).

Crude is higher in the O/N session ($79.97 up +29c). Trading oil must be doing some peoples head in. It’s like handling a hot potato, but, all highly organized and in a confined range. With positive global equity markets and a dollar slightly suspect vs. the EUR has temporarily, at least, restored crude’s appeal as an inflation hedge. Technical analysts must be happy that the commodity is advancing again on their resistance levels just above $80 a barrel. With momentum and an investor attitude that the economic situation will not get much worse has their graphs predicting a $90 print. They might be getting ahead of themselves as this morning weekly inventory reports are expected to show another build in stocks. As stated before, the upper end of the range is attainable if investors are convinced that fundamentals are turning the corner. If the dollar threatens to advance even further for surety reasons, the black stuff will come under renewed pressure. Last weeks EIA inventory report recorded a rise in crude stocks by +3m barrels to reach a total +337.5m, w/w. They were forecasted to increase by only +1.9m barrels. For market direction, we continue to depend on equities and investors ‘on’ again ‘off’ again risk appetite, however, there are too many variable remaining this week that could potentially put a spanner into the bull’s way of thinking.

After two trading sessions of doubt, gold is extending last months gains. Forgetting the dollar, the commodity managed to print record highs in both EUR and GBP terms yesterday. Not a bad way to trade the commodity taking the dollar element out of it. Investors are willing to divert monies into the ‘yellow metal’ as a hedge against currency market instability. Last month it managed to print its first monthly gain since Nov. European sovereign debt issues and a ballooning UK deficit with the potential of ‘hung’ parliament after the next general election has investors seeking some sort of portfolio surety. For most of last month, a stronger greenback had curbed the greater demand for commodities, but it’s the big picture concerns about deepening EU deficits becoming contagious that is supporting the yellow metal on ‘much deeper’ pull backs. Investors continue to seek the ‘ultimate currency’, being gold, on pull backs ($1,136).

The Nikkei closed at 10,253 up +31. The DAX index in Europe was at 5,761 down -15; the FTSE (UK) currently is 5,475 down -10. The early call for the open of key US indices is lower. The US 10-year backed up 1bp yesterday (3.62) and is little changed in the O/N session. Treasury prices having been trading close to home pending Greece’s announcement of new measures to cut its budget deficit. All week, treasury prices have remained elevated on the threat of credit-rating downgrades for Greece. Any credit-worth signs of a European rescue package should see relief rally in yields to back up. Until then, despite how expensive product looks and despite stronger data the market waits for concrete signs of eventual exit measures. Tomorrow we get next week’s US funding announcement (3’s, 10’s and 30’s). By week’s end expect some give in the curve to absorb this product next week.

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