Jittery Markets Seesaw With Every Greek Headline As Time Runs Out, China Replunges

Before we get into the main story for headline scanning algos which of course is the endless Greek tragedy, it is worth noting that while overnight China scrapped its 75% loan to deposit ratio cap for commercial banks, broadly seen as yet another easing move, the PBOC also engaged in its first liquidity injection via reverse repo since April in what many took to be an indication that an RRR-cut is increasingly less likely. As Reuters reports, “The decision to resume injecting funds via reverse bond repurchase agreements after a nine-week hiatus shows the bank is moving proactively to offset rising seasonal cash demand as companies prepare to file their first-half financial reports.”

Money rates are typically under pressure toward the end of the quarter, and in particular at the end of the first half, when banks and corporates stock up on cash to burnish their balance sheets.

 

In addition, large batches of IPOs have from time to time frozen a large amount of short-term liquidity.

 

China’s securities regulator said late on Thursday it had approved a new batch of 28 IPOs after 24 firms just finished subscriptions this week and last.

 

In response, the People’s Bank of China (PBOC) injected 35 billion yuan ($5.64 billion) into the market through seven-day reverse bond repurchase agreements on Thursday, its first open market operation since mid-April.

 

The central bank also set the yield on its seven-day reverse repos at 2.7 percent, down sharply from 3.5 percent in April but about in line with the currency market rates.

The result, as well-meaning as it may have been, is that after two days of increases Chinese stocks retumbled – with another cash-draining battery of IPOs over the corner surely not helping – sliding down 3.5% to close near the lows, and set the early sour mood ahead of today’s endless Greek discussions.

So back to the main event of the day, the so far fruitless Greek negotiations continued in Brussels where nobody really knows what is going on but there has been a constant barrage of disjointed headlines, many of which leaked by interested sources, and which are outright contradictory. In other words, business as usual.

Furthermore, even if there is some framework of a deal it once again has to go back to Athens to get parliamentary approval as Tsirpas is forced to make even more concessions.

In any event some of the key news were that the ECB kept the ELA flat with Handelsblatt reporting that 6 members of the governing council demanding to stop the ELA immediately. This is clearly a return to the old negotiating “tactic” of threatening the Greek banking system with a liquidity halt if there is no deal.

For now, however it isn’t working, as Greece was said earlier to have been given an 11am deadline to come up with a final proposal, which came and went only for the creditors to state that a Sunday “deadline” was perfectly acceptable.

Then there was some speculation that the Troika had failed to agree on a single Greek proposal only for them to promptly deny it.

Then, after it was reported that Greece had in fact submitted a counter to the IMF’s counter,  there was a brief burst of euphoria when the following headline hit:

• GREECE DOCUMENTS CAN BE BASIS FOR A DEAL: EU OFFICIAL

Only for the ES spike to fizzle when this came moments later:

• GREEK GOVT REMAINED FIRM IN ITS POSITIONS, OFFICIAL SAYS

Bloomberg adds that Greece hasn’t accepted the documents sent by the institutions.

And then this hit:

• GREECE, CREDITORS FAIL TO REACH AGREEMENT AHEAD OF EUROGROUP

So where do we stand?

Nobody really knows as the market continues to react to headline after headline, without any clear sense of direction although based on the green tone to equity futures – if only for now – there is once again a sense of optimism that a deal will be struck in the last minute… the same as the optimism last week… and the week before… and so on, as hope has managed to push the S&P to just shy of all time highs on “hope” of an imminent Greek deal which always is just around the corner.

Expect countless more headlines over the day, and into tomorrow and the weekend as a deal appears improbable, and even if the Brussels delegation does come up with a resolution, the Greek parliament will throw up all over it and then the entire charade will repeat once again.

Bloomberg’s Richard Breslow summarized it best when he said that “for right now, the market is watching and thinking “To-   morrow, and to-morrow, and to-morrow, Creeps in this petty pace from day to day.” Let’s hope it isn’t a “tale Told by an idiot, full of sound and fury. Signifying nothing.” Shakespeare ended Macbeth with the fifth act. One can only hope the politicians do the same.

* * *

Greece aside, a quick recap of overnight markets showed early strength in equity markets buoyed by the reports that China is to relax loan to deposit ratios, while the PBoC injected funds into the interbank market for the 1st time in 2-months, gradually waned and major indices settled broadly lower. Much of this stemmed from the fact that the latest actions by the Chinese central bank prompted speculation that the Bank will refrain from cutting RRR to support economic growth

Stocks in Europe have come off the worst levels, but the price action remained volatile, as the talks between Greece and its creditors resumed this morning and are expected to be presented at the Eurogroup summit. At the same time, Bunds have gradually edged lower to trade near the unchanged mark and Greek bonds came off the worst levels of the session. Of note, it was reported that the Eurogroup is determined to conclude its meeting by 1700CET so it does not clash with the leader summit, while a banking source noted that ECB has approved ELA request for Greek banks by the local central bank.

EUR weakness was observed across the board, driven by the downside breakdown of EUR/JPY, which in turn triggered selling
pressure in EUR/USD and EUR/GBP. At the same time, CHF gradually pared the initial weakness, as market participants
positioned to hedge their risks amid the Greek impasse. Of note, analysts at Barclays forecast that the BOE will hike rates by 25bps in Q1 2016 and then start a 25bp rate hike cycle every 6 months.

Despite the volatile price action in equity markets and the FX in Europe this morning, WTI and Brent crude prices held steady, with WTI trading little changed. At the same time, little in terms of underlying price action was observed by gold, which too trades near the unchanged mark as markets participants await further developments relating to Greece.

In summary: European shares stay higher, having pared earlier losses, with the telco and bank sectors outperforming and travel & leisure, retail underperforming. Greece, creditors fail to reach agreement ahead of Eurogroup. Earlier, Greek govt handed over a revised proposal to stave off a default; Greece didn’t accept a set of documents sent by the creditor institutions. ECB said to leave Greek banks ELA ceiling unchanged. South Korea cuts 2015 growth forecast, plans fiscal stimulus package. The Italian and Dutch markets are the best-performing larger bourses, Swedish the worst. The euro is little changed against the dollar. Japanese 10yr bond yields rise; German yields increase. Commodities decline, with nickel, silver underperforming and natural gas outperforming. U.S. jobless claims, continuing claims, Bloomberg consumer comfort, Kansas City Fed index, personal income, personal spending, Markit U.S. composite PMI, Markit U.S. services PMI due later.

Jim Read:

After late night talks ended shortly after midnight with a deal still yet to be reached, technical teams agreed to reconvene at 6am CET before Greek PM Tsipras, the IMF’s Lagarde, the ECB’s Draghi and the European Commission’s Juncker are due to resume talks at 9am CET. A Eurogroup meeting has been scheduled now for 1pm CET.

There appeared to be no further comments from either Tsipras or the Creditors following the meeting late last night. Before this we learned that, after a number of time consuming meetings during the day, Greece and its Creditors had still failed to bridge the remaining gaps in proposals that are on the table. Eurogroup President Dijsselbloem confirmed this while the WSJ released a copy of the counter proposal from the Creditors which showed where the differences still remained. In particular this includes the proposed corporate taxation increases, sales taxes and defense spending cuts amongst others areas. Various wires are reporting that the IMF in particular appears to be leading some of the pushback with Reuters quoting the Fund’s Chief Lagarde as saying ‘you can’t build a programme just on the promise of improved tax collection, as we have heard for the past five years with very little result’. That yielded a response out of Tsipras who said that ‘this odd stance seems to indicate that either there is no interest in an agreement or that special interests are being backed’. Greece’s State Minister Flabouraris, meanwhile, said that the revisions by the Creditors to some of Greece’s proposals were ‘absurd’.

So with all this it was a weaker day for equity markets across the board yesterday. Led by a -1.77% decline for Greek equities, the Stoxx 600 (-0.38%), DAX (-0.62%), CAC (-0.24%), IBEX (-0.71%) and FTSE MIB (-0.53%) all ended lower with the bulk of the losses coming early in the session and seemingly sparked by a Bloomberg headline stating Tsipras as saying that the Creditors didn’t accept Greece’s proposals. The weakness then filtered over into the US session where we saw the S&P 500 sell off 0.74% with losses relatively broad-based across sectors. Treasuries (-4.1bps) and Bunds (-2.9bps) resumed their usual safe haven status as 10y yields fell to 2.368% and 0.841% respectively while in the periphery a volatile session in which yields traded in a 10bps range saw 10y yields in Spain (+0.8bps), Italy (-1.0bps) and Portugal (-0.8bps) actually finish relatively unchanged. There was some softness in credit markets too. Crossover initially spiked +13bps wider on the early headlines, before settling down to end +6bps wider at the close while in the US we saw CDX IG end +2.25bps wider.

Looking at the reaction in the Asia timezone, with the exception of China it’s a largely weaker start for most major bourses. Indeed, the Nikkei (-0.32%), Hang Seng (-0.31%), Kospi (-0.01%) and ASX (-0.65%) are all lower while in China the Shanghai Comp (+0.43%) and Shenzhen (+0.24%) have both displayed their usual volatility with the Shanghai Comp in particular trading between gains and losses 10 times already this morning. 10y Treasury yields have risen +1.1bps while similar maturity yields in South Korea (+1.1bps), Singapore (+1.0bps) and Australia (+0.2bps) are also wider. Markets in Korea are also reacting to the news that the Korea Finance Ministry has cut its GDP forecast for 2015 to 3.1% from 3.8% in light of the MERS outbreak and the drought. The CPI forecast was also lowered from 2% to 0.7% while the ministry announced it was planning a stimulus package of $13.5bn in response.

Meanwhile, late last night China’s State Council announced that it had approved a draft amendment to scrap the 75% loan-to-deposit ratio (a 20-year old legislation) for Chinese banks. The Standing Committee of the People’s Congress now need to give their approval in order for it to become effective. With the obvious positive potential implications for credit growth, the proposed move is another step in the recent liberalization of markets in China through financial reform in a bid to stimulate the economy. China Construction Bank (+2.06%), Agricultural Bank of China (+0.80%) and ICBC (+0.96%) are all up on the news.

In truth away from Greece there was fairly minimal news flow elsewhere yesterday. In the US we saw the third reading for Q1 GDP revised up to -0.2% saar as expected from the previous -0.7% print. We also saw an upward revision to personal consumption to 2.1% saar, a 30bps move higher. Finally Core PCE was kept unchanged at +0.8% saar. The Dollar swung around with the various headlines before the DXY eventually closed down a modest -0.15%. The Treasury market also had to deal with a weaker 5 year auction yesterday where we saw the bid-to-cover ratio fall 2.39, well below the average of the last 10 auctions of 2.54. Elsewhere, one date to now mark in the diary is that of the next Fed’s semi-annual Monetary Policy report in front of congress which will take place on July 15th after it was confirmed that Fed Chair Yellen will be returning back to Capitol Hill.

Data wise in Europe yesterday the focus was on Germany where we got a weaker than expected IFO survey reading, particularly in light of the previous day’s PMI’s. The headline declined 1.1pts to 107.4 (vs. 108.1 expected) supported by falls for both the current assessment (down 1.2pts to 113.1; expected 114.1) and expectations (down 1pt 102.0; expected 102.4) with the latter falling for the third straight month. Our colleagues in Europe noted that level-wise the expectations reading is still consistent with 0.5% qoq GDP growth in Q2 however. Elsewhere, yesterday we saw the final Q1 GDP reading in France kept unchanged at +0.6% qoq.

Turning over to the day ahead now, it’s set to be all eyes on Greece this morning once again with Tsipras’s meeting with the Creditors followed by the Eurogroup meeting shortly after. Data wise we’ve got German consumer confidence and UK CBI reported sales as the main releases this morning. It’s set to be a busy session in the US this afternoon however headlined by the May PCE deflator (the Fed’s preferred inflation measure) reading. As well as this we get the May readings for personal income and spending as well as initial jobless claims, Kansas City Fed manufacturing activity index and the flash composite and services PMI prints.