Danske Daily: February 27, 2012

The main event over the weekend  was the G20 meeting in Mexico. However, for the eurozone  countries, the meeting turned out to be somewhat of a  disappointment, as, instead of putting more money on the table, finance ministers from the world‟s largest economies stepped up the pressure on Germany in particular to increase the size of the eurozone's own EUR500bn ESM rescue fund. Hence, hopes that the eurozone „firewall‟ (ESM) could be increased to EUR750bn simultaneously with the IMF committing itself to raise its firepower against contagion to about EUR1,000bn were crushed.

Japan's finance minister, Jun Azumi, said it very clearly, “Europe must demonstrate its own efforts for the entire world to see”,  while UK  Chancellor  George  Osborne said, “Until we see the colour of their money, I don‟t think you are going to see any money from the rest of the world.” The  G20 communiqué said that a euro area review of its financial firewall against the crisis is “essential” before any considerations can be made to boost IMF resources.

The Bundestag will today vote on the EUR130bn Greek bail-out. The vote comes as the pressure on Germany is obviously building for more ESM funds. According to the FT, there were signs, however, that Germany‟s stance was softening. Germany has lately become quite isolated with the Dutch government supporting an ESM increase; Finland has  also indicated it would be willing to back an increase. Both Finland and the Netherlands have traditionally  stood alongside Germany on these matters.  Whether Germany can accept a boost to the ESM will be in focus ahead of the EU summit on 1-2 March. However, as German officials have pointed out several times, March has 31 days. Hence, even if agreement is not reached later this week, an increase could still be agreed ahead of April‟s IMF spring meetings in Washington.

The lack of G20 money on the table over the weekend has not derailed risk appetite this morning with Nikkei up 0.5%. Japanese stocks were also supported by JPY that is trading at the weakest level against USD since July last year. EUR/USD has been stable overnight trading at 1.3450 – the highest level since December last year. Oil prices are marginally lower in Asian trading with the WTI front-contract trading at USD109.40/bbl. Oil prices rose strongly last week as a combination of global growth optimism and fears that an escalation of the conflict with Iran will disrupt oil supplies.

But in fact we doubt that  either Greece  or oil prices will be the main focus this week. Instead investors will turn their focus  to the  three-year LTRO on Wednesday.

Global Daily
Focus today: Very limited data is due to be released today, with US pending home sales the  only number of interest. After a decline of 3.5% last month, a small rebound is expected in January. The main event will probably be the vote on the Greek bailout in the German parliament, which we expect to be voted through. The main focus for the rest of the week will be on the result of the second three-year LTRO from the ECB (Wednesday), the EU Summit (Thursday-Friday) and US ISM (Thursday).

Fixed income markets: As expected, the G20 meeting clarified nothing with regard to boosting the firewall around Europe. Even if the German parliament approves the Greek bailout package today, there are probably still too many hurdles to clear the way for a sell-off in the US and German bond markets. Early this week the market is likely to trade in anticipation of the ECB 3Y LTRO auction results, which are published Wednesday. Generally, we expect the range trading to continue for some time, and we are not even sure if the LTRO can change that. Belgium will print ‟17, ‟22 and ‟41 bonds today.

FX markets: EUR/USD moved significantly higher last week as risk appetite returned to global financial markets and as fears of a Greek collapse receded. The latest CFTC data showed that on Tuesday night the market had barely scaled back on short euro positions. The latter is probably the reason for the strong move higher in EUR/USD on Thursday and Friday last week. However, the most interesting new info in the CFTC data is that speculators cut their bets in favour of JPY aggressively by 42% in the week ending 21February. The change in net commercial positions in respect of the JPY underlines that the market is currently changing its view on JPY. USD/JPY has moved close to 4% higher over the past 10 days. But, as US rates have only moved marginally higher, we are a bit sceptical about the sustainability of the current JPY sell-off. Risks are, however, that we are witnessing a breakdown of 2011‟s correlations with relative rates and, looking at positioning  – even after the latest unwinding of long JPY positions  – there is certainly room for more JPY downside.