London Update: Central Bankers Take Centre Stage While Greek Issues Lurk in the Wings

The biggest events of the day should be the meetings of the Bank of England and the European Central Bank. We should be concentrating on the prospect of GBP50 bn of asset purchases from the BOE and further soothing words from dapper Draghi as he shows his commitment to throwing everything bar the kitchen sink to prevent a credit crunch in the currency bloc. But instead Greek politicians who have been meeting all through the night are again stealing the show and after missing yet another deadline, are expected to finally agree to fresh austerity measures later today just in time to receive the next tranche of bailout funds to avoid a disastrous default on 20th March.

The twists and turns in negotiations in Athens this week seem to have come to this: a 20% cut in the minimum wage, labour reforms and bank recapitalisations, the new spending cuts should amount to 1.5% of GDP. However, the area that hasn’t been agreed on is EUR 300mn of pension cuts, which Greece’s politicians, who face elections in 3 months, are treating like a holy cow. Pension cuts are expected to account for EUR 300mn, however right now they account for 0. A press conference is scheduled for 1700GMT/ 1200 ET, which may announce that a deal has been agreed, which would then allow the Eurogroup of Eurozone finance ministers to start work on rubber stamping the EUR 100bn write-down of Greek private sector debt that would wrap up PSI negotiations.

Greece is a complex beast to deal with. If you think that getting agreement on spending cuts is hard then implementation is even harder. Greece’s political infrastructure is an enormous tangled web of 1,500 separate office buildings with hundreds of ministries who barely talk to each other. So agreement on cuts is actually the easy part. In reality the only option for Greece to get its debts down to any sustainable level is for its bondholders to accept even more losses further down the line, which is likely to lead to more volatility in financial markets.

But that is not what is driving markets today. There is definitely a sense of Greek fatigue sweeping financial markets this week, and the prospect of a deal in Athens, or even a near-deal, is enough to set risk off. EURUSD is testing 1.33 and AUDUSD is back above 1.0800. European stocks have also opened higher along with banking stocks. The banks have led the rally higher in European markets and when they rise it tends to signal a broader based risk rally. This is also confirmed by the rise in AUDJPY – the ultimate risk barometer - which is back above 83.50.

Markets seem to be clinging to the macro news today: the prospect of more liquidity from Europe’s central banks and also “progress” in Athens, even though Credit Suisse and Rio Tinto announced earnings below analyst estimates.

It could end up being a buy the rumour, sell the fact type scenario with markets rallying into the central bank meetings and then selling off later on once we get the “facts” from Draghi and King and of course from Athens. The markets will be looking to see if Draghi hints that the ECB would be willing to take losses on its EUR 40bn of Greek debt. If he sounds cool on this idea then risk may sell off as it could make the final negotiations with Greece’s private sector bond holders slightly trickier if they feel they are getting a raw deal with official holders getting off lightly.

It’s not just Greece where pensioners are getting socked, so too in the UK. The BOE meeting will be analysed more closer in a report later this morning, but the big issue is whether or not we get GBP50bn or GBP75bn – further penalising savers. We are with consensus expecting GBP50bn, but the Bank is in a corner when it comes to QE, it may not want to do more but it hinted it would last year so to retain credibility it must come up with the goods at midday today.

Any sign the Bank is reluctant to dish out more stimulus could propel GBPUSD above 1.60. The pound sold off sharply yesterday as risk retreated and is lagging the risk rally today, possibly as some investors try to keep sterling weak ahead of the BOE meeting only to buy it later if the market believes the BOE is less dovish than “expected”.

So it’s a big day for the markets and very Europe focused. Economic data is likely to be side-lined although US initial jobless claims will be watched closely at 1330GMT and expectations are high for another good number post the impressive January payrolls figure.

Central bank liquidity + good economic data has fuelled the risk rally so far, today may be volatile but if this continues then any risk sell-offs could be shallow in the near term.