Buy Rumor+Sell Fact=Turnaround Tuesday
Guest post by Marc Chandler of Marc to Market.
News that a deal was finally struck to ensure Greece can repay its largely official creditors saw the euro test the $1.3010 area twice in Asia before Europe took profits, knocking the euro below $1.2940. The euro has now traded on both sides of Monday’s range and a close below yesterday’s low (~$1.2944) would undermine the technical tone. It would signal potential for a deeper pullback toward $1.2880-$1.2910.
The Greek deal has many moving parts, but there are key pieces. A formal decision will not made until December 13 and needs formal approval by a few parliaments. A German vote is possible at the end of the week or early next week. Merkel may have to once again rely on support from the opposition Social Democrats for her European agenda.
Before that final approval, Greece is expected to conduct a bond buy-back (new haircut for the private sector) at 35 cents on the euro. This is clearly a poor, even if telegraphed, development for holders of Greek government bonds, and that especially means Greek financial institutions. The financial sector shares are off 8-9% today, while the overall Athens’ Stock Exchange is off 1.5%.
The official sector resisted a haircut, but accepted a significant restructuring, which includes lower interest rates, fees, and longer maturities. The ECB’s profits from the Greek bonds it purchased under SMP will be recycled back to Greece.
In some ways, despite the modifications and bond buy-back, the general strategy remains the same. The aid will be distributed in several tranches into first part of next year and contingent on further reforms. A carrot in the form of more forbearance for when a sufficient primary budget surplus is achieved, has also been offered.
As the dust settles on the Catalan election, it is becoming clearer that Madrid may turn out to be the biggest winner, even if Rajoy must engage Mas in a serious discussion about fiscal transfers. Attention now must turn from such lofty ideas of independence to putting together a coalition. The way many observers cast the issue, the separatists have a majority. However, the center-right CIU and the center-left ERC agree on very little and is unlikely to govern together.
A coalition with Rajoy’s PP would give a government 69 seats in the 135-seat chamber. The 2013 budget will be among the first challenges of the new government. Mas may be forced to make concessions on his austerity push. Madrid, perhaps anticipating such needs, announced today it would top up its fund for regional assistance near year by 5 bln euros.
News that Canada’s Carney will succeed King at the helm of the BOE overshadows other issues. The knee jerk reaction to the announcement (buy sterling and sell Canadian dollars) was largely unwound before the close of the North American session yesterday. The Canadian dollar has marginally outperformed sterling today. Carney’s move to the BOE does not take place for several months, during which other monetary decisions are likely.
Separately, the UK left Q3 GDP unchanged at 1%, but reduced the year-over-year pace to -0.1% from flat. It seemed that for a number of reasons, nearly all the engines of growth were in sync. That seems to be more a good coincidence than a indication that the UK is emerging from its economic stagnation.
Sterling managed to make a marginal new high for the move, nudging through last Friday’s high ~$1.6051 in Asia before coming off in Europe. Yesterday’s low just below $1.60 offers initial support and below there additional support is seen in the $1.5950-60 area.