Global Daily

In Greece party leaders’ approval has been postponed once again, but a deal appears to be close after opposition to minimum wage cuts was reversed.

ECB  would be willing to give up profits on its Greek government bond holdings according to press reports.

Risk sentiment remains slightly positive on hopes  that  a deal will eventually be reached in Greece.

Markets Overnight

In Greece the meeting  in which party leaders  were supposed to  agree on the  austerity measures  as  demanded by  the EU, ECB and IMF  was postponed once again. The meeting was originally scheduled for yesterday evening, but instead Prime Minister Papademos held meetings with representatives from the Troika. Despite the postponement Greece  appears to have moved  substantially  closer to a deal. Most importantly, the party leaders yesterday reversed their opposition  to a 20% cut in the minimum wage that so far appears to have been the main obstacle for an agreement, and are now expected to meet later today. If they approve the austerity measures, a Euro Group Finance Minister is expected to be called later this week and the Greek parliament could vote on the austerity measures as soon as this weekend.

According to Wall Street Journal ECB would be willing to give up some of the profits it could earn on the Greek government bond holdings it purchased in the secondary market, see Wall Street Journal. This could mean as much as EUR11bn in debt relief in addition to the EUR100bn expected from a PSI-deal. In the US the race for Republican presidential nomination appears to remain open  after Rick Santorum won the non-binding primary in Missouri and the caucus in Minnesota.

Santorum was also ahead in the  Colorado caucus  that has not yet been called, see Bloomberg. Data released yesterday showed that consumer credit in the US in December for the second month in a row expanded much faster than expected suggesting deleveraging has started to ease, see Bloomberg.

Despite the uncertainty about Greece the sentiment remains slightly positive as the market appears to believe that a deal will eventually be reached. The US stock market yesterday closed slightly higher with S&P 500 ending up 0.2%.  Asian stock markets are also higher this morning supported by a better-than-expected earnings report from Toyota.

In the US bond market bond yields have continued to edge slightly higher on the back of the positive stock market and the strong consumer credit data. In the FX market EUR has largely been able to hold on to yesterday’s gains on hopes that a deal will eventually be reached in Greece. EUR/USD is this morning trading 1.325. JPY has also weakened and USD/JPY is trading slightly above 77 this morning.

Global Daily

Focus will remain on Greece, where the party leaders in the unity government  are expected to meet before noon today and possibly approve the austerity measures demanded by the EU, ECB and IMF. Although there is no hard deadline, it would most likely be negative for risk sentiment if the austerity measures  are not approved today.

Early today there will be a batch of interesting economic data for the euro area that might give a better idea of the degree of stabilization in the euro-area economies in late 2011/early 2012. These data include German foreign trade in December, December industrial production in Spain and Bank of France business confidence for January.

Finally, EU is also scheduled to release its first Alert Mechanism Report on
Macroeconomic balances, where the EU commission evaluates the need  to adjust economic policies in individual countries.

Fixed income markets remain very sensitive to the news flow out of Greece. Yesterday’s rise in the long end of the EUR swap curve by 5-10bp on news that the Greek government was finalising the draft for the second bailout was a good example of this. We still think that the case for higher rates in the long end and steeper curves in the EUR and USD swap curves is building, and we like the idea of beginning to position cautiously for this.

Our conviction about the US case was fuelled last night by another robust increase in US consumer credit indicating that the recovery is gaining strength. Besides the developments in Greece, the markets will look at the government bond auction in Germany today. The Bobl 0.75% Feb17 will be tapped for another EUR4bn taking the total amount outstanding of the bond to EUR8bn.

FX markets: EUR/USD continues to move higher on the back of improved global macro conditions and what is likely to be a gradual unwind of short speculative positions. The Greek negotiations remain an important event risk, but given that a deal  is reached we expect euro support to remain - seeing potential up to 1.3350 in the short term. With the global economy avoiding recession and the Fed able to keep the US money market curve flat we remain of the fundamental view that EUR/USD belongs in the 1.30s. SNB's Jordan yesterday tried to calm market concerns about the risk of a break of the 1.20 floor on EUR/CHF. Jordan stated that Hildebrand's exit has not changed the SNB's position on the minimum target and that the SNB will maintain the floor "from the moment the market opens in Sydney on Monday to when it closes in New York on Friday" - i.e. trying to reduce concerns about a 'technical' break during thin overnight trading. We continue to expect the SNB to be successful in keeping EUR/CHF above 1.20.