Danske Daily Analysis: February 20, 2012

Greece detailed the last spending cuts and we seem to be getting closer to a deal, but the sustainability of Greece’s debt burden remains an issue

On Saturday China cut the reserve requirement rate by another 50bp

The positive risk sentiment remains intact this morning with stock markets and
EUR/USD higher

Focus today will be on the Eurogroup Finance Minister meeting


Markets Overnight

Over the weekend we have moved closer to an agreement on a second bail-out deal for Greece. The government has been able to identify the last EUR325m in savings needed to reach the EUR3.2bn  in  total demanded by the  Troika (EU, ECB and IMF), see Bloomberg. The bills will be introduced to Greek parliament today and a final vote is expected as soon as Wednesday. According to press reports the Greek parliament might also vote on a “collective action clause” on existing Greek government bonds. ECB on Friday finished a swap of its Greek government bonds that will exempt the new government bonds from a possible collective action clause.

The German Finance minister Schäuble over the weekend said that Greece was “on the right path” and appeared to be softening his stance on Greece a little bit, see Telegraph. The remaining issues to be solved at today’s Eurogroup meeting will be the closing of the funding gap needed to reach the targeted 120% of GDP debt burden by 2020 and  a possible agreement on a closer monitoring system for Greece, see Wall Street Journal.

On Saturday China cut the reserve requirement rate for commercial banks by 50bp for the second time in less than three months, see Flash Comment China: PBoC cuts the reserve requirement by another 50bp dated 19 February 2012. China also released property prices for January, which showed continued declines in home prices but also tentative signs of stabilization in the property market, see Flash Comment China - Home prices edge lower, but tentative signs of stabilisation dated 19 February 2012

Risk sentiment this morning remains positive on the back of hopes of a deal on Greece today and China’s reserve requirement cut this weekend. The US stock market on Friday closed slightly higher with S&P 500 finishing up  0.2%. US stock futures have edged higher in Asian trade and Asian stock markets are higher across the board this morning with Nikkei and Hang Seng up 1.1% and 0.6% respectively. In the  US bond market bond yields are largely unchanged since the European market close on Friday.

In the  FX market EUR/USD has moved higher on hopes that a deal on Greece is imminent and this morning EUR/USD is trading slightly above 1.32. USD/JPY has also continued to move higher after trade data released overnight showed that Japan’s trade deficit increased in January. In the Scandinavian currencies both NOK and SEK have strengthened slightly on the back of the improved risk sentiment in the market.

Global Daily

Focus today: All attention  will be on the Eurogroup  Finance  Minister meeting in Brussels, where the finance ministers are expected to be able to approve the second EUR130bn rescue bail-out package for Greece. The Eurogroup meeting is scheduled to start at 15:30 CET, so most likely there will not be a statement from the meeting before the markets close in Europe today. The final details  of the PSI-debt swap agreement should be ready before the Eurogroup meeting,  but will probably not be released until after the meeting. The last remaining issue to be negotiated at today’s Eurogroup meeting is largely how to close the funding gap needed to reach the targeted 120% of GDP debt burden by 2020. Collective action clause, contribution from ECB from its holding of Greek government bonds and possible lower interest rate on the emergency loans appear to be the main instruments left. Design of a tighter monitoring system for Greece (including restricted access to aid disbursements) and IMF’s share of the aid package is also expected to be part of the negotiations. The US market is today closed for Presidents Day.

Fixed income markets: If progress is made on the Greek bail-out package, as suggested by the news flow over the weekend, this should be positive for risk sentiment today. But, even if a deal is reached it has to be approved by the national parliaments and this would again take time. The sentiment today might also get support from the Chinese cut of the reserve requirement ratio for the second time in less than three months. Today Norway is coming to the markets with a tap of NOK 3bn in the NGB 4.50% May-19.

FX markets: Speculative investors have reduced their long JPY positions heavily, which helps explain the recent JPY depreciation. The question is whether.