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A story based on unidentified sources that Germany's stance on Greek debt restructuring is softening touched off a sharp rally for the Euro. But is the story even true and even if it is, will it sustain the Euro rally for long?
The Wall Street Journal was out with an article late Monday (nighttime in Europe) indicating that - according to “people familiar with the matter”- Germany is considering softening its stance in demands for an upfront restructuring of Greece's debt load and is willing to go the route of offering further bailout loans without any haircuts, etc. for bondholders in the near term. Meanwhile, the word is that Greece's ability to fund itself will run dry within a matter of weeks . The market seems to be taking the WSJ article as a reliable indicator of the actual heated negotiations that must be taking place after last Friday's talks failed to yield anything despite no other major news agencies reporting similar developments.
Taking a step back, we have to wonder whether a new Greek bailout really helps anything in the longer run - it certainly won't quiet the protestors in Greece, as any new bailout deal will comes with its own demands for austerity and other strings attached. In fact, many of the already discussed solutions for Greece involve remarkable intrusions on the idea of national sovereignty, with forced sales of national assets that would be administered by a special company rather than the Greek government, etc.. The entire attitude of this approach could be described as: “We're going to put your house in order since you couldn't do it yourself”. This is a historic test of the idea of the EuroZone and whether a nation's people will allow what many might call the injury to their pride, or whether the situation continues to escalate from the popular side to a point at which the Greek people decide to rid themselves of the EU albatross. A similar risk exists of course, for Ireland and we'll have to keep an eye on Spain as well.
For now, the market is willing to embrace the extend-and-pretend game in the near term, and EuroZone sovereign debt spreads and interest rate spreads gave a big sigh of relief in support of the Euro today on the news. It was interesting that the currency almost sniffed out this development ahead of the fact, as the last few days of action saw its relative strength far greater than the moves in other markets would have supported. An inside job? We'll probably never know.
Weak Aussie
The Aussie is divergently weak, falling even against the lowly greenback overnight while its kiwi cohort to the south enjoyed record highs against the USD once again overnight. The weakness comes as the current account data for Q1 was far weaker than expected and on weak housing numbers. The trend is now more clearly weaker in housing prices and history tells us that a housing bust is a very damaging thing for an economy, even if the short term action in Aussie is likely to remain overshadowed often by its correlation with commodity prices and risk appetite. Additional cause for concern might be tonight's Q1 GDP report, which is expected to show a QoQ contraction for the first time since Q4 of 2008 (and at expectations of -1.1%, it would be worse than the country's worst GDP print from the global financial crisis and the worst GDP print in 20 years). One imagines where Aussie might be trading if copper was a dollar lower and if we ever see a sustained break in the global equity rally.
Odds and ends
Moody's placed Japan's Aa2 bond ratings on review for a potential downgrade and this, combined with a bond market sell-off in the wake of the supposed developments on Greece, sent JPY longs scurrying for the exits. This comes at an interesting technical juncture for USDJPY (Ichimoku daily cloud close to recent lows) and EURJPY (recent support also clearly at the Ichimoku daily cloud)
The Bank of Canada was out with its decision to leave the rate unchanged at 1.00%. On balance, the guidance was a bit hawkish relative to expectations, as the bank said that inflation might remain above 3% in the short term (though it expected it to fall back to 2% next year), that it expected commodity prices would remain high, that the Canadian economy still has a “material excess supply” and that some stimulus would be “eventually withdrawn” even if rate rises were to be “carefully considered” (wording unchanged from last statement there.). ON the dovish side, the bank mentioned risks of “greater headwinds” due to the strong currency and risks from the EuroZone periphery. All in all, not a lot of new information to go on and the rally in risk and oil prices this morning seems more important for CAD's short term direction.
The already fairly stale S&P/CaseShiller US home price data release today underlines what was already broadly discussed/acknowledged of late - that the US housing market is double dipping as prices relentlessly revert to the long-established trend despite all of the Fed's frantic efforts. According to the 20-city index, US house prices are now back to where they were in April of 2003, having now fallen below the lowest point that was reached shortly after the initial housing crash during the financial crisis.
Chart: EURUSD
EURUSD has broken back through the key 55-day moving average and, assuming the market's enthusiasm for the EU's extend and pretend mentality and the “QE3 trade” (see more below on this) can be maintained, the pair could be in for a test higher still, with the key resistance areas at Fibonacci levels liket he 0.618 around 1.4565 and the 0.764 just above 1.4700. Meanwhile, a close back below the 55-day would be a sign that the rally is overplayed.
Looking ahead
This is a very busy week ahead, now that the US and UK are back from their three-day weekend. The final of the regional US manufacturing surveys are up shortly today ahead of tomorrow's ISM manufacturing survey, which promises to garner plenty of interest after some shockingly weak data on the manufacturing front this month in the US. The US ADP employment number is also on tap for tomorrow and the focus on the US employment data is also intense after several weeks of very poor jobless claims numbers.
In the background, the horrific US data and the supposed signs of a continuation of extend-and-pretend mentality in Europe seem to have the market in risk loving mode at the moment. After all, the market knows what QE2 did for asset markets - and if QE3 is in the wings, hurrah for that, too. In this crazy world, a repeat of what we have seen at times in the past, the worse the data comes in, the better it might be for risk on the assumption that the timing and size of the next bailout only rushed forward and gains in magnitude. This thinking is Ponzi scheme thinking - enjoy the con game while you can.
Economic Data Highlights
Japan May Markit/JMMA Manufacturing PMI out at 51.3 vs. 45.7 in Apr.China Apr. Leading Index out at 102.1 vs. 101.8 in Mar.Japan Apr. Jobless Rate out at 4.7% as expected and vs. 4.6% in Mar.Japan Apr. Industrial Production out at +1.0% MoM and -14.0% YoY vs. +2.0%/-12.4% expected, -13.1% in Mar.Australia Apr. RPData-Rismark House Price Index fell -0.3% MoM vs. -0.6% MoM in Mar.New Zealand May NBNZ Activity Outlook out at 39.7 vs. 29.5 in Apr.New Zealand May NBNZ Business Confidence out at 38.3 vs. 14.2 in Apr.Australia Apr. Building Approvals out at -1.3% MoM and -11.5% YoY vs. -1.8%/-12.7% expected, respectively and vs. -19.3% YoY in Mar.Australia Q1 Current Account Balance out at -10447M vs. -10000M expected and -8091M in Q4Australia Q1 Australia Net Exports of GDP fell to -2.4% vs. -1.1% expected and 0.0% in Q4Australia Apr. Private Sector Credit out at 0.0% MoM and +3.3% YoY vs. +0.5%/+3.8% expected, respectively and vs. +3.5% YoY in Mar.Japan Apr. Vehicle Production fell -60.1% YoY vs. -57.3% YoY in Mar.Japan Apr. Construction Orders rose +31.4% YoY vs. -11.0% in Mar.Japan Apr. Housing Starts rose +0.3% YoY vs. -3.0% expected and vs. -2.4% in Mar.Switzerland Q1 GDP out at +0.3% QoQ and +2.4% YoY vs. +0.7%/+3.0% expected, respectively and vs. +3.1% YoY in Q4Germany Apr. Retail Sales out at +0.6% MoM and +3.6% YoY vs. +1.8%/+1.5% expected, respectively and vs. -3.6% YoY in Mar.Switzerland Apr. UBS Consumption Indicator out at 1.585 vs. 1.685 in Mar.Sweden Q1 Current Account out at +71.1B vs. +51.5B in Q4Germany May Unemployment Change out at -8k vs. -30k expected and -33k in Apr.Germany May Unemployment Rate out at 7.0% as expected and vs. 7.1% in Apr.Norway Apr. Retail Sales out at 0.0% MoM and +11.4% YoY and vs. +0.7%/+3.4% expected, respectively and vs. -5.4% YoY in Mar.EuroZone May CPI Estimate out at+2.7% YoY vs. +2.8% expected and +2.8% in Apr.Canada Apr. Industrial Product Price out at +0.5% MoM vs. +0.7% expected and vs. +1.0% in Mar.Canada Apr. Raw Materials Price Index rose +6.8% MoM vs. +3.0% expected and +5.8% in Mar.Canada Bank of Canada left the rate unchanged at 1.00% as expectedUS Mar. S&P/CaseShiller 20-city Home Price Index fell -0.23% MoM and -3.61% YoY vs. -0.2%/-3.4% expected, respectively and vs. -3.35% YoY in Feb.
Upcoming Economic Calendar Highlights (all times GMT)
US May Chicago PMI (1345)US May Consumer Confidence (1400)US May NAPM-Milwaukee (1400)US May Dallas Fed Manufacturing Activity (1430)New Zealand Q1 Terms of Trade Index (2245)Australia May AiG Performance of Manufacturing Index (2330)China May PMI Manufacturing (0100)Australia Q1 GDP (0130)Chian May HSBC Manufacturing PMI (0230)
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