Greece's Budget Did Not Impress Markets
23/11/09 23:36
Last week, I was speaking with a staff at one of the
largest FX prime brokers, who made an interesting
comment. I was inquiring about their current policy
on taking a letter of credit from a client at another
major private bank. What this basically means is that
fx deals can be executed through the prime broker on
the assurance that the client of the private bank is
good for the money within the allowable margin. What
is important is that the prime broker is presently
not accepting LOC's from any major financial
institution. Why are have they set up such
restrictions for potential clients and increase in
volume? It is the view of the prime broker that risk
remains within the financial sector and that the bank
may not be good for the money should a second wave
equity and commodity selling occur. The view asserts
that we may be in for another material correction and
are therefore managing their own internal risk. This
is a small dose of inside information that can be
noted on a global macro view.
UBS, Bloomberg
Greece's budget did not impress markets greatly on Friday and despite the government's pledge to reduce the deficit to 9.1% of GDP, the Greece-Germany 10y spread jumped to more than 172bp, the highest since early July. Some of the widening can be attributed to fears that Greece's debt financing would become difficult if its banks were no longer able to participate in the ECB tenders. But looking beyond the "ECB carry", the 65bp move in the 10y spread since early October, when the tenders were a non-issue, reflects wider problems with macro fundamentals, which EURUSD longs may have neglected over the past few months due to the dollar's problems.
UBS, Bloomberg
Greece's budget did not impress markets greatly on Friday and despite the government's pledge to reduce the deficit to 9.1% of GDP, the Greece-Germany 10y spread jumped to more than 172bp, the highest since early July. Some of the widening can be attributed to fears that Greece's debt financing would become difficult if its banks were no longer able to participate in the ECB tenders. But looking beyond the "ECB carry", the 65bp move in the 10y spread since early October, when the tenders were a non-issue, reflects wider problems with macro fundamentals, which EURUSD longs may have neglected over the past few months due to the dollar's problems.
Last year's events have shown that contagion can strike at very short notice and if more questions are being asked about the weaker Eurozone countries, the euro will be affected. Fiscal conditions for many countries in the Eurozone will worsen in 2010, but with the ECB on course to remove liquidity measures, funding will prove difficult to come by. Even if spreads do widen significantly, reflecting a decline in sentiment towards the Eurozone, the impact on the euro will depend on factors behind the widening and prevailing market trends. We explore these relationships to identify warning signals for FX should the situation in the Eurozone's economic periphery worsen.
The only economic data release was existing home sales, which rose +10.1%m/m in Oct, stronger than consensus +2.3%, after rising +8.8% previously. The latest Fed comments came from St. Louis Fed Pres Bullard, who discussed extending the asset-purchase programs and also the possibility of a longer delay before the Fed begins raising the Fed funds rate. Bullard does not currently have a vote on the FOMC, but he becomes a full voting member in January so his remarks are highly significant. Bullard said that it would be hard to hike rates at a time when the jobless rate is still growing, but that rising inflation expectations might be enough to force the issue. He also added that the US dollar is still viewed as the world's reserve currency, and said "we don't want to lose" this.
* ECB President Trichet reiterated his support for Fed Chairman Bernanke's strong dollar comments and said the ECB will reflect on exit strategies at the December meeting. But Trichet did not provide any new details with regards to policy shifts or the future of the 12-month tender operations.
* German GDP and IFO data are due ahead. Final Q3 GDP is expected to be unchanged while the IFO surveys are expected to show modest increases. But we continue to expect growth worries and risk aversion, either due to market trends or intra-Eurozone problems to weigh on the EUR up ahead.
* Several MPC members, including BoE Governor King, Deputy Governor Tucker, Markets Director Fisher and policymakers Sentence and Posen will testify on the November 2009 Inflation report to the Treasury Committee in Parliament. We expect the general tone to remain dovish and to affirm the need for a weak pound for economic rebalancing.
* Sterling will remain difficult to trade under these circumstances especially as its correlation to risk is constantly in flux, while the fundamentals of EURGBP and GBPUSD are also diverging due to idiosyncratic risks associated with each pair. We adjust our forecasts in EURGBP back to 0.90 in 1m and 3m.