Good News From Greece, So Why Is Euro Falling?
Sober Look | Jul 17, 2015 06:32AM ET
Once again, let's take a look at the latest on the situation with Greece:
1. After getting comfortable that the Eurogroup will support Greece, Mario Draghi announced that the European Central Bank will resume increasing the emergency liquidity assistance loan balance for Greek banks. Capital controls will likely have to be in place for some time but banks could open next week.
2. Draghi also surprised some by throwing his support behind the IMF's push for some debt forgiveness for Greece.
3. The Eurogroup agreed to release a €7bn "bridging" loan to Greece. One of the drivers here is to make sure Greece does not default to the ECB (due next week). The idea of the ECB having to take a write-down really spooks the Eurozone leadership.
4. The €7bn will come out of EU's European Financial Stabilisation Mechanism and the UK wanted to make sure it's not taking any Greek exposure. The agreement with the UK now requires the Eurozone to cover UK's losses.
Risk assets continued to rally on the news. Greek bond yields declined further, with the 2 year falling below 25%.
Similarly, the CDS spreads contracted. Problem solved...
One market that continues to surprise some is the euro, which fell sharply on the positive news from Greece. As I discussed before, the euro is a great base currency for carry trades, which are popular in a "risk-on" environment.
Short euro, long sterling is one such trade that takes advantage of the material short-term rate differential. That's why we see euro-sterling decline sharply after the Greek situation was supposedly "stabilised".
Get The News You Want
It's not surprising the ECB supports the IMF's (and to some extent the US) position that Greek debt is not sustainable and lenders must be more realistic. Shown below is the latest debt-to-GDP projection.
The chart below seems to suggest that European nations outside the euro did better. Some of this is due to the fact that a number of nations that joined the euro suddenly found access to a great deal of cheap euro-denominated financing (including cheap mortgages, municipal debt, etc.).
OK, enough of Greece for now. Market's other favorite topic, China, also grabbed some headlines.
China GDP trackers (models that take into account items such as rail traffic and electricity use) were pointing to a lower GDP growth reading than what the government reported. While some "liberties" with economic figures were probably taken, a more likely explanation is that China's stratospheric equity-market rally and the accompanying unprecedented trading volume temporarily boosted economic activity in the financial sector (massive brokerage fees, etc.). This is likely to be reversed shortly.
Latin America continues to struggle with the end of the commodities supercycle. 1. Here is broad commodity index and...
2. ... growth in GDP and terms of trade (an indicator of export activity) for Latin America.
Canadians are wondering why exports (excluding natural resources) are not expanding in spite of weaker Canadian dollar. Perhaps Mexico is part of the answer. Manufacturing stuff in Mexico for sales in the US and elsewhere has become really cheap.
Now I'd like to look a whole slew of interesting developments in the equity markets as the Greece situation "settles down". Here we go.
Biotech's outperformance has been spectacular.
And on a much shorter time frame, Google (NASDAQ:GOOGL) is up 11% in after hours trading on strong Q2.
Oh, yes, almost forgot. Netflix (NASDAQ:NFLX) market cap is now larger than GM.
We've had a massive rally in German shares over the past few days. Elsewhere in EU the situation is similar. Nikkei 225 is approaching the year's high again.
VIX dropped below 12 again. This was the largest 5-day decline in VIX on record.
Now some food for thought. The FOX News 2016 Republican Presidential Nomination Poll. No comment.
Disclosure: Originally published at Saxo Bank TradingFloor.com
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