TradeTheNews.com European Market Update: Growing concerns about the knock-on effect of the Greek debt swap gives risk aversion sentiment momentum

Tuesday, March 06, 2012 5:43:23 AM

 TradeTheNews.com European Market Update: Growing concerns about the knock-on effect of the Greek debt swap gives risk aversion sentiment momentum

***Economic Data***
- (EU) ECB: €1.4B borrowed in overnight loan facility vs. €783M prior; €827.5B parked in deposit facility (fresh record high) vs. €820.8B prior
- (UK) Feb Halifax House Prices M/M: -0.5% v +0.3%; 3M/Y: -1.9% v -1.6%e
- (UK) Feb New Car Registrations Y/Y: -2.5% v 0.0% prior
- (EU) Euro Zone Q4 Preliminary GDP Q/Q: -0.3% v -0.3%e; Y/Y: 0.7% v 0.7%e (second reading)
- (EU) Euro Zone Q4 Preliminary Household Consumption Q/Q: -0.4% v -0.2%e; Govt Expenditures Q/Q: -0.2% v 0.0%e; Gross Fix Capital Q/Q: -0.7% v -0.4%e

Fixed Income:
- (ZA) South Africa sold total ZAR2.1B vs. ZAR2.1B indicated in 2018, 2021 and 2041 bonds
- (AT) Austria Debt Agency (AFFA) sold €1.1B vs. €1.1B indicated in 3.4% Nov 2022 Bonds; Avg Yield 2.890% v 3.322% prior; Bid-to-cover: 2.0x
- (GR) Greece Debt Agency (PDMA) sold €1.14B vs. €875M indicated in 26-week Bills; Avg Yield 4.80% v 4.86% prior; Bid-to-cover: 2.63x v 2.71x prior
- (EU) ECB allotted €17.5B in 7-day refinancing Tender at fixed 1.0%vs. €30Be
- (HU) Hungary Debt Agency (AKK) sold HUF50B in 3-Month Bills; Avg Yield 7.25% v 7.22% prior; Bid-to-cover: 1.83x v 1.62x prior
- (UK) DMO sold £1.0B in 0.75% March 2034 I/L Gilts; Real Yield 0.044% v 0.64% prior; Bid-to-cover: 1.93x
- (EU) EFSF sold €3.44B €3.5B in 3-month Bills; Avg Yield 0.0516% v 0.222% prior; Bid-to-cover: 1.98x v 3.2x prior

*** SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM ***
***Notes/Observations***
- Super Tuesday Republican primaries
- RBA leaves Cash Target Rate unchanged at 4.25% (as expected)
- Bank deposits with ECB reach yet another record high
- Risk aversion picks up momentum due to China GDP outlook and Greek PSI deadline
- Dealer chatter circulating that Greece Govt might extend deadline for PSI; Greece Govt denies such talk as deadline remains Thursday, March 8th

Equities: >FTSE 100 -1.1% at 5807, DAX -1.6% at 6757, CAC-40 -1.5% at 3433, IBEX-35 -1.9% at 8290, FTSE MIB -1.8% at 16,485, SMI -1% at 6094

- European shares opened lower as investors continue to worry over China's growth prospects and Eurozone. Earlier chatter circulated that Greece Govt might extend deadline for PSI but the Greece government denied it and reaffirmed that the deadline was still March 8th. Furthermore, macroeconomic data continue to be disappointing in Europe.
- Peugeot [UG.FR] fell during the session after announcing a capital raise of €1.0B and announcing it would not pay a dividend for 2011. RWE [RWE.DE] was up after EBITDA was higher than analysts' expectations even though net and revenue came in softer and company announced that it would cut its 2011 dividend.

Speakers: >- Institute of International Finance (IIF) document noted that there would be damaging ramifications from a Greek disorderly with any hard default to lead to sizable bank recapitalizations costs which could easily hit €160B. Such a default would hit the ECB and Peripheral countries (Portugal, Ireland, Spain and Italy) and would likely need support. The report added that it was hard to see how contingent liabilities would not exceed €1.0 trillion
- EU's Rehn reiterated the view of seeing signs of stabilization in Euro Zone and was convinced that officials could turn the tide in the coming months. He also noted that the Euro Zone was in mild recession but a risk of credit crunch has been prevented
- Brazil President Rousseff commented after meeting German Chancellor Merkel that the Euro region was devaluing its currency which is problematic for Brazilian trade but was assured the region would create a solid fiscal situation. Brazil supported higher IMF funds but sought a bigger participation for developing countries in the IMF
- Germany Chancellor Merkel reiterated there was a need to prevent economic imbalances and discussed state of Euro with Brazil's President Rousseff . Germany planned to discuss global imbalances at April G20 meeting but did not have any discussions with Brazil over higher IMF contribution
- Greece might receive small tranche of €130B second bailout package to help pay off partial arrears. Dep Fin Min Sachinidis stated that such money would go to paying off some of the €6.0B in accumulated arrears that the Greek government owes private contractors
- Czech Central Bank published its banking sector stress test results which concluded that the sector would withstand extreme recession in Europe. Banking sector capitalization would stay above 8% even under adverse stress scenario of deep drop of 7% in GDP due to any marked increase in the European debt crisis. It did note that some banks would require capital in any extreme recession by total CZK19.0B (roughly o,5% of GDP)
- China economic sub-committee of the Chinese People's Political Consultative Conference (Think Tank) chief Zheng Xinli commented that he saw China 2012 GDP growth of about 9% vs. official forecast of 7.5%. He noted that the lowering of the official economic growth target for 2012 was largely symbolic and left leeway to adjust economic development pattern. Inflation might be below 4% this year, helped by increasing food supplies. Lastly he added that China should consider joining IMF efforts to aid euro zone countries
- Former China Vice Commerce Min Ma Xiuhong commented that China needed to enhance Yuan Foreign Direct Investment (FDI) trial program and open its capital account. She noted that China's investment environment remained good and was not deteriorating. The recent slowdown in foreign direct investment in China was due to factors such as the euro-zone debt crisis and increased competition from developed economies
- China sovereign wealth fund (CIC) was said to be working on continued funding mechanism and would consider 'good investment opportunities' in Europe. CIC would not be a part of China's decision on potential aid to Europe
- India Central Bank Board member Rajaraman commented that the country faced stagflation risk as oil prices climb and economic growth stumbles. Noted that the power sector and labor reforms were key to increase economic growth. The RBI remained wary of inflation risks and stressed that the Govt must restore fiscal rigor
- India Farm Min Pawar was said to have requested that PM Singh lift the ban on cotton exports as it would affect next year's crop

Currencies:
- Dealers noted of a growing concerns about the knock-on effect of the Greek debt swap which was dampening risk appetite sentiment throughout the session. The Asian equity session was Dealer chatter circulated that Greece Govt might extend deadline for PSI which added to risk aversion flows. The denial by the Greek govt of any extension of the deadline did not do much to improve sentiment in the session. The IIF warning of the consequences of a hard Greek default appeared to be the dominate theme in the session. The JPY currency was firmer in the session against the major pairs.
- The EUR/USD slumped to test below 1.3140 in the session while EUR/JPY cross tested 106.25.
- The peripheral spreads were wider from the getgo with the Spanish 10-year moving back above the 5% level.
- The stronger USD against the European pairs weighed upon commodities. Spot gold moved below last week's lows of $1,688/oz while NYMEX front month crude was off almost a dollar per barrel to test back below $106

Political/ In the Papers:
- Analysts and institutions, represented by the IIF, are believed to make up about half of Greece's private sector bonds. According to the FT, citing a source close to the process, participation in the PSI debt swap is unlikely to exceed 75-80%. However, if collective active clauses (CACs) were used, the participation level might be 90-95%. (The value of the private sector debt swap has been estimated at about €206B).
- In the UK, the spread between the average mortgage rate and the Bank of England's base rate hit the highest level since early 1995 (at 3.66%). A report in the London Telegraph noted mortgage rates are expected to rise even further. Please note that the development comes as various UK banks have started to raise mortgage rates amid higher funding costs.
- With the rising backlash in Spain over EU demanded austerity measures, the Telegraph Ambrose Evans-Pritchard suggested that Spain's Prime Minister Rajoy is more interested in doing what is best for Spain and not the EU, as evidenced by his decision to raise the country's 2012 deficit target.
- The IMF anticipates Portugal will return to the markets in 2013 with no bondholder cuts. It sees Portugal dealing with its imbalances, and working with structural reforms. The improvements in the current account deficit are better than expected, although it may take three more years for it to narrow significantly.
- The ratings agency Moody's warned Ireland will likely require a second bailout. They also expected the country to encounter challenges regaining access to the markets in 2013. It will likely require reliance on the ESM, at least partially, when the current support program ends.

***Looking Ahead***
- 6:00 (TU) Turkey to sell new Fixed Rate 2014 Bonds
- 6:00 (TU) Turkey to sell new Inflation Linked 2022 Bonds
- 6:00 (EU) OECD Jan Consumer Prices Y/Y: No est v 2.9% prior
- 7:00 (EU) ECB to drain €219.5B in 7-day Term Deposit Tender
- 7:00 (BR) Brazil Q4 GDP Q/Q: 0.2%e v 0.0% prior; Y/Y: 1.5%e v 2.1% prior; 4Quarters Accumulated: 2.7%e v 3.7% prior
- 7:45 (US) Weekly ICSC Chain Store Sales
- 8:30 (BR) Brazil Feb Vehicle Production: No est v 211.8K prior; Vehicle Sales: No est v 268.3K prior; Vehicle Exports: No est v 33.1K prior
- 8:55 (US) Redbook Retail Sales
- 9:00 (EU) ECB weekly Forex Reserves
- 9:45 (UK) BOE to buy £1.5B in 2027-2060 Gilts in reverse auction
- 10:00 (CA) Canada Feb Ivey Purchasing Managers Index: 62.0e v 64.1 prior
- 10:00 (MX) Mexico weekly International Reserves
- 11:30 (US) Treasury to sell 4-Week and 52-Week Bills
- 12:00 (US) DOE releases March short-term energy outlook
- 14:40 (FR) France President Sarkozy speaks on France 2 TV
- 16:30 (AU) RBA's Lowe speaks to Australian Industry Group in Sydney
- 16:30 (US) Weekly API Energy Inventories
- (US) Super Tuesday
- Republican Alaska Caucus
- Republican Georgia Primary
- Republican Massachusetts Primary
- Republican Idaho Caucus
- Republican North Dakota Caucus
- Republican Ohio Primary
- Republican Oklahoma Primary
- Republican Tennessee Primary
- Republican Vermont Primary
- Republican Virginia Primary
- Republican Wyoming Caucus

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