Danske Daily - 28 February 2012

S&P declares Greece in selective default. The move was expected and should have little market impact.

Oil prices finally retreat; high prices are expected to depress demand.

Markets overnight

Last night the ratings agency Standard  & Poor‟s declared Greece in selective default. S&P said the downgrade was due to the retroactive insertion by Greece of a „collective action clause‟ (CAC) that forces all bondholders to accept  the deal put forward by the government for bonds issued under Greek law.

The ratings agency further added that the Greek move “constitutes the launch of what we consider to be a distressed debt restructuring...we believe the retroactive insertion of CACs will diminish bondholders‟ bargaining power in an upcoming debt exchange.”

The move was not as such a surprise and should have little market impact as the ratings agency warned earlier this month that it would consider Greece to be in default if it added CACs. The „selective default‟ follows a similar move by Fitch last week. The „selective default‟ once again raises the question of whether Greek CDSs should be triggered or not. S&P noted that Greece could face an imminent default if an insufficient number of bondholders accepted the latest bond swap offer. However, it also said that once the bond swap had been carried out, it would „upgrade‟ Greece‟s rating to CCC.

The move came on the same day as Germany approved the second bail-out to Greece and Merkel warned that forcing Greece to re-introduce the drachma could have consequences “that are incalculable and therefore irresponsible.”

The risk rally that has characterised this year ran a bit out of steam yesterday in Europe with major indices in the red. But there was nothing dramatic and the US indices closed almost flat with the S&P500 in a small plus. US equities were helped by a rise in US pending home sales of 2% compared  with a median forecast of just 1.0%, fuelling optimism that the recovery is finally spreading to the otherwise distressed housing market.

Oil prices finally retreated somewhat yesterday with the WTI front-month contract down approximately USD1.5/bbl over the past 24 hours to currently USD108/bbl. It seems that the market has finally realised that the latest move higher in prices could in fact depress demand. In that respect, note that US fuel demand has been surprisingly weak this winter.

In the currency market, USD/JPY has fallen back towards the 80 level after the latest yensell-off. Apparently, the weaker yen has triggered some repatriation of funds by exporters. But the move lower probably also  reflects that the speculative long yen positions have already been taken out. See IMM update published yesterday.    

Global Daily

Focus today: Markets are generally awaiting the result of the three-year LTRO from the ECB tomorrow. Main releases today  include US durable goods orders and consumer confidence from Confidence Board. Durable goods orders rebounded in December and are expected to give back some of that gain in January. Consumer confidence is on the rise as equity markets, the labour market and housing market are all doing better. We expect a small further rise in February. Before noon, the EU Commission  will also publish the batch of confidence indicators for the EU covering both consumer confidence and business confidence. We look for a small rise in line with what we have seen in other survey data lately.  The EU‟s confidence numbers generally lag other surveys like the German ifo a bit and should catch up slightly with the improvement seen here lately.

Fixed income markets: European swap rates moved into the low end  of  the range yesterday, as an unsurprisingly disappointing G20 meeting led to a surprisingly sharp decline in long EUR rates. In the US, improving housing data prevented an equally sharp decline in bond yields, supporting our case of USD-EUR spread widening in the long end of the curve. The overall picture remains unchanged. The market is awaiting the LTRO results and is basically still trading from event to event on the euro crisis. Focus has now shifted from Greece to Germany which remains very reluctant to boost the  eurozone emergency funds. Our interpretation is that this is having some costs in terms of growth expectations and increasing tail risks a bit, which is why rates are moving lower into the range. Today Italy is printing ‟17 and ‟22 bonds. With 10-year Italian benchmark yields breaking lower through 5.5% in recent days, the auction should see decent interest.

FX markets: The euro continues to be well supported with EUR/USD trading at 1.3436 this morning. The big event for the FX market will be the three-year LTRO tomorrow that we expect will support risk appetite and therefore also the euro. Resistance in EUR/USD is seen at 1.3550 (the 2 December high). JPY finally received some support overnight as exporters and investors apparently took advantage of the latest move higher in USD/JPY and repatriated funds.

Scandi Daily

Sweden: In Sweden retail sales and PPI will take centre stage. In general we look for slightly weaker numbers compared  with consensus. Yesterday. EUR/SEK was pushed marginally higher to 8.8380 and the risk is still tilted to the upside for the cross.