• Troika review of Greece’s bailout programme
• Ukrainian crisis
• US consumer sentiment to reach last summer’s highs
A quiet day on the data front, but luckily many of the recent market drivers seem to be firing up. After European Central Bank President Mario Draghi’s speech on Thursday failed to weaken the euro, it seems that the credibility of the central bank is waning. On the other hand, the quite dovish talk from Federal Reserve’s chair Janet Yellen has been taken much more seriously, with focus now moving towards wage rises. The five-year breakeven inflation rate has recently been rising, and has reached the two-percent level, suggesting that inflation expectations are becoming well-anchored in the US. Thus the net effect of a dovish Fed waiting for the labour market to heal and improving fundamentals keep the USD pinned and everybody guessing ahead of next Wednesday’s Federal Open Market Committee (FOMC) meeting. On the same day, the euro area’s April flash inflation statistic will be published, so EURUSD could be in for some movement.
Possible credit rating actions today include France (S&P), Italy (Fitch), Netherlands (DBRS), Spain (Fitch) and Portugal (Moody’s and S&P).
Ukrainian crisis
After the Asian session’s market holidays in Australia and New Zealand, together with the as-expected Japanese consumer price indices overnight, the markets have little drivers until next week’s events. Thus, today’s market action should be dominated by headlines on Ukraine. Casualties were reported on Thursday, and Russia warned of “consequences”, initiating military drills across the Ukrainian border. At the same time US president Barack Obama warned about additional sanctions as Russia has not fulfilled its part of the pact signed just last week.
The attached chart shows the CFD of iShares MSCI Russia Capped Index ETF. The blue horizontal line was an important technical support level (the low of both 2012 and 2013), and after it was broken in the beginning of March, it turned into a resistance level and was tested and rejected in the beginning of April. The German stock market seems to be moving in tandem with the Russian market.
The BBC has a good timeline of the crisis. This is a good opportunity to share a lesson I learned from my boss in the early nineties during the Moscow crisis: “it is a bad idea to bet on an apocalypse – even if you win, you are unable to collect your winnings”. Investors seem to view the crisis as an opportunity to buy risk assets at a discount. I don’t think the markets fully respect the potential financial downside that a further deterioration of the geopolitical situation could create. Thus the dip that everyone wants to buy could very well be in the pipeline.
Troika review of Greece’s bailout
The International Monetary Fund, the European Commission and the European Central Bank, which represent the official creditors of Greece, will complete their review of how the country has been fulfilling its end of the bailout programme. This is the final step before the next tranche of over EUR eight billion of new loans will be. As Greece is still very much broke, and the European Parliament elections are getting close, expect plenty of goodwill and positive statements.
We already got a taste of this on Wednesday, when the troika confirmed that Greece in 2013 has attained a primary budget surplus of 0.8 percent of gross domestic production. It was a farce, as the official Eurostat methodology would indicate a deficit of 8.7 percent, as The Wall Street Journal noted.
This just reflects the desperation of European leaders. Reuters reminds us that the false surplus allows Athens to spend seventy percent of the ‘surplus’ as it sees fit, and this is simply too happy a coincidence near the elections. The Greek government is weak and lagging in polls. The European Commission apparently wants to keep the Greek government in power and minimise the number of “populists” in the European Parliament.
Achieving a primary surplus in 2013 is a key condition for further debt relief. It is widely expected that the Greek debt held by other euro area governments, either directly or via rescue vehicles, will be restructured, but not before the European elections are over, as voters in creditor countries might not like the losses.
US April Thomson Reuters / University of Michigan Survey of Consumers (13:55 GMT).
The final reading for April’s consumer sentiment is expected to reach 83.0, the highest reading since last summer. Robust retail sales in March, improving labour market and the stock market at all-time-highs should push up consumer optimism, but it should be noted that the sentiment index is getting near the higher end of its multiyear range. The Citigroup US economic surprise index still remains at depressed levels, near the lows seen in 2013 and 2012, and has plenty of room to improve now that the weather effects are finally behind us. Remember that all workers are consumers. With rising optimism comes the demand for higher wages, and at some point rising optimism will be deemed to be “bad for markets”, as it will increase inflationary pressures and thus push the Fed to its first interest rate hike since the financial crisis begun.
