Danske Daily: February 9, 2012

The Greek coalition government has failed to agree internally on the  Troika’s demands ahead of today’s crucial EU meeting. This could mean a Greek default in March.

Chinese inflation rose to 4.5% y/y. This surprised the markets but in our view it mostly reflects the timing of Chinese New Year, so the increase should not worry investors.

Markets Overnight

The Greek tragedy continues. Yesterday it looked like the Greek coalition government had agreed on austerity measures, but negotiations continued overnight and comments from Greek officials this morning indicate that the government has not yet been able to fulfil the  Troika’s  demands. EU and IMF officials participated in the negotiations overnight and this morning Greek Finance Minister Venizelos said that a deal had not been reached yet. Hence, we are well into the 11th hour and there is still no deal prior to today’s crucial EU meeting. If the Greek government fails to agree internally it will be impossible for EU ministers to give the go-ahead for a new Greek bailout, which will most likely result in a disorderly Greek default in March.

The uncertain Greek situation has sent Asian stocks lower this morning after US stock markets ended up yesterday on hopes that a deal on Greek austerity measures was inching closer. However, the downward move in Asian stocks this morning has not been dramatic indicating that a lot of the risks relating to Greece are already reflected in market pricing.

The Greek uncertainty has had little impact on the global FX markets and the major FX crosses have been trading sideways overnight.

In China consumer price inflation in January accelerated to 4.5% y/y (consensus: 4.0%, DB: 4.2%) from 4.1% y/y in December. The main reason for the acceleration in inflation is the seasonal distortion from an early Chinese New Year Holiday. Food prices usually increase in connection with this holiday and for that reason there will be an upward bias to inflation in January and a downward bias  to inflation in  February. Hence, the acceleration in inflation in January should prove temporary. CPI inflation in our view is poised to drop below 4% y/y in the coming months. Today’s number does not change our
view that we will see cautious monetary  easing from People’s Bank of China in the coming months. We expect the reserve requirement to be cut by another 150bp in H1 2012, but we expect the leading interest rate to remain unchanged.

Global Daily

Focus today: In Greece negotiations will continue to get the party leaders in the unitygovernment to  agree to the austerity measures demanded by the  Troika. The last remaining issue is a proposed cut in pensions disbursement. The goal is to have an agreement ready for final approval at the extraordinary Eurogroup Finance Minister meeting scheduled to start at 18:00 CET in Brussels. IIF is also scheduled to meet in Paris to make final arrangements for  the  possible  implementation of a Greek debt swap agreement. The ECB meeting today should prove less exciting than recent meetings, see ECB preview: ECB waiting for second 3Y LTRO from 8 February 2012. With less stress on financial markets and economic data showing tentative signs of stabilization we expect ECB to keep the refi-rate unchanged in connection with today’s  meeting. The 3-year LTRO has so far been a big success and with a new 3-year allotment looming in late February there is no reason for ECB to introduce new instruments at this stage. As long as the Eurogroup has not approved a deal with Greece, we do not expect ECB to make any decisions on how it will handle its Greek government bonds holdings. Despite encouraging data recently we expect Bank of England (BoE) to lift the asset purchase target by GBP50bn to GBP325bn, see Flash Comment: BoE preview: Another GBP50bn QE - and more to come from 7 February 2012. This view is in line with consensus so we do not expect any major market impact from BoE’s announcement.

Fixed income markets: With the ECB on hold, today’s rate meeting is not likely to be much of a market mover unless the central bank against our expectations introduces any new non-standard measures. The markets are waiting for the next 3-year tender from the ECB, which is due on 29 February. We will watch out for any communication regarding the next LTRO, as this is interesting after several international banks said they would not use it. We will look for comments from Draghi on whether he will try to encourage the use of the tender. On the government auction front, there will be  a minor tap of an estimated SEK0.75bn of Swedish SGB I/L 0.25% Jun-22.

FX markets: The euro remains resilient, despite Greek event risks, and with investors most likely remaining overweight dollar/underweight euro we see potential for a further move higher in EUR/USD. The question is whether today's central bank meetings will reinforce this trend? As argued above, we expect no changes in monetary policy or monetary policy communication from the ECB, but an increase in the BoE's asset purchase programme. This should mean little response in EUR, but potentially further pressure on GBP - though an increase of GBP50bn is already largely priced. Note though, that the USD-GBP correlation remains elevated and that a move in EUR/GBP is therefore likely to be mirrored in EUR/USD. We prefer to stay neutral ahead of the meetings, but  see value in picking up both pairs on dips.