Risk Markets Tumble Ahead of Crucial Greek Austerity Vote

Risk markets sold off sharply Friday as investors lightened their positions ahead of the austerity package vote in Greece this weekend, probably on Sunday. The vote is crucial for Greece to secure the EUR 130b second bailout, in timely manner, to avoid disorderly default in March. EU head of finance ministers had made it bluntly clear that "no disbursement without implementation" and EU will review the package from Greece again next Wednesday. Juncker also urged ECB to "look, within the framework of its independence, what sort of contribution it can make to the debt reduction of Greece". At the time of writing, European stock indices are broadly lower with DAX and CAC down more than -1%. In the currency markets, dollar rebounds strongly against other major currencies.

Even though the austerity plan was agreed among political leaders, Greece is still unable to secure the EUR 130b second bailout from EU/IMF. Luxembourg Prime Minster Juncker said yesterday after the meeting between EU finance ministers in Brussels that "despite the important progress achieved over the last days, we did not yet have all necessary elements on the table to take decisions." Juncker required Greece to firstly pass the austerity package in parliament on Sunday, secondly find extra EUR 325m in savings for 2012, and thirdly give "strong political assurances" for continuing the reform implementation after April's general election. Juncker noted that the three elements are needed before EU can make the decisions on approving the bailout. EU finance ministers would review the Greek proposal again next Wednesday. Greek Finance Minister Venizelos responded saying that "between now and next Wednesday, we must decide whether our country's salvation will come from within."

Also weighing down on market sentiments is China's trade data. On the surface, trade surplus widened sharply to $27.3b in January. However, that's due to sharply decline in imports, by -15% to $122.7b. Export dropped -0.5% to $149.9b, continuing it's gradual down trend. Economists viewed steep decline in imports as a sign of extremely weak domestic demand. But, there were also talk that the data was heavily distorted by the timing of Chinese new year at late January. Also, some economists pointed out that the sharp decline in important was mainly due to fall in commodity prices, like iron ore which was down -11%. But after all, the numbers are certainly no something to cheer for.

Japan's Finance Minister Azumi made rare comments about invention today. Azumi said back in October, he decided to intervene to weaken yen when USD/JPY hit 75.63 as that level was judged "perilous" to the economy. Intervention then stopped when USD/JPY hit 78.20. Azumi then commented that "yen weakened nearly three yen from a critical condition of 75 yen and it stayed between around 77-78 yen till the end of last year". It's extremely unusual for Japan's finance minister to talk about specific levels. Later on the day, the finance minister corrected that Azumi didn't mean the levels but was just referring to numbers off a board in the parliamentary debate. Meanwhile, Azumi also reiterate the stance to intervene to curb speculative moves and he's ready to "conduct solo intervention".

In RBA's monetary policy statement, the bank lowered 2012 inflation forecast to 3.00%, down from prior projection of 3.25%. Underlying inflation are expected to be at 2.75%, unchanged from prior projection. However, average growth in 2012 are expected to be at 3.5%, sharply lower than prior projection of 4.00%. The forecasts are based on assumption of keeping interest rate on hold at 4.25%. Overall, RBA expect inflation to "remain around the midpoint of the target range for most of the next couple of years" and that provides “scope for easier monetary policy should demand conditions weaken materially."