Danske Daily: Slight Reversal of Last Week's Positive Risk Sentiment

Greek government and IIF fail to reach agreement on voluntary debt swap ahead of today’s Eurogroup meeting, but negotiations continue.

There has been a slight reversal of past week’s positive risk sentiment – EUR slightly weaker and stock futures slightly lower.

Germany and France to propose delay in Basel III implementation today

Focus today will be the Eurogroup  Finance Minister meeting and  the joint FrenchGerman Finance Minister press conference in Paris

Markets Overnight

Greece’s government and IIF this weekend failed to reach an agreement on a
voluntary debt restructuring of Greece’s private  debt (PSI-negotiations), see  Wall Street Journal. Hence, the Greek government will not be able to present an agreement at today’s Eurogroup Finance Minister meeting. However, the PSI negotiations continue and it now appears that the deadline is to have an agreement before  the EU-summit on 31 January. The stumbling block in the negotiations continues to be the coupon on the new long-term-bonds to be swapped for existing ones. IMF supported by Germany appears to be insisting on a lower coupon and a larger haircut to secure a long-term sustainable debt
level for Greece. Although it is expected that an agreement will be reached eventually, the failure to do so this weekend might increase fear of a disorderly default.

According to Financial Times  Germany and France will today call for important
elements of the Basel III rules to be watered down to mitigate negative effect on
growth, see Financial Times. The proposal is expected to be revealed in connection with the German Finance Minister Schäuble and French Finance Minister Baroin’s scheduled joint press conference today.

There has been a slight reversal in risk sentiment on the back of disappointment that Greece and IIF have not been able to conclude the PSI negotiation. The US stock marketon Friday closed slightly higher with S&P 500 ending up 0.1%. Most  Asian stock markets are closed today in connection with the celebration of the Chinese New Year. In Japan Nikkei is trading largely unchanged this morning.

In the US bond market bond yields edged slightly higher and the yield curve continued to steepen on the back of the improved risk sentiment in the market.  10-year US bond yields are up 1bp to 2.01% since market close in Europe on Friday. In the European bond market Italian and Spanish bond yields also continued to edge slightly lower.

In the  FX market EUR has weakened slightly  and EUR/USD is this morning trading slightly below 1.29.

Global Daily

Focus today: There are no major data releases today and the Eurogroup meeting could therefore become a key driver for today’s market. A deal for a “voluntary” Greek bond swap is still not in place although today’s Eurogroup meeting had been seen as a deadline.

The Eurogroup meeting, which will focus on the Greek financing programme and PSI, starts at 14.30 CET and will be followed in the evening by ministerial meetings on the European Stability Mechanism (ESM) and the fiscal compact treaty. Chinese New Year celebrations begin today so no major Chinese data releases this week.

Fixed income markets:  This week will see continued relatively high activity with Denmark, Sweden and Norway printing. We will start out with the Norwegian auction after a week in which Norwegian government bonds underperformed significantly against swaps (some 25bp in the 10Y) mainly due to the supply pipeline. An estimated NOK6bn in the 4.25% May-2017 NGB will be tapped today.

Otherwise, the Greek “soap” continues with the negotiations on the debt restructuring not really going anywhere. From a market perspective it should be viewed as positive that the IMF is demanding deeper write downs as this supports a more sustainable Greek debt outlook. Unless we see a major break-down of negotiations this should not prove to be a major negative market mover, but it could cause some nervousness in the morning markets ahead  of  the Greek  Finance  Minister presenting the existing deal at the Eurogroup meeting at 13:30 CET.

FX markets: The euro rebound has lost steam following renewed concern about whether a deal on the Greek debt swap can be reached. However, the market remains very short the euro and with global macro data improving a near-term agreement (perhaps already today) certainly has the potential to send EUR/USD back higher again - and most likely also above its 2012 high (strong technical resistance is not found before around the 1.32 region). With the Fed expected to signal low rates for a very long time at the upcoming FOMC meeting and activity data generally expected to show improvement also this week we continue to see upside potential for the strongest cyclical EM currencies and the commodity currencies (e.g. AUD, CAD and NOK).