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Confusion over Greek deal

Last updated 2/9/2012 12:53 PM ET (GMT -5) 0 Comments - Add your comment

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David Morrison

Derivatives Market Strategist, U.K.

Thursday 9th February 2012

Headlines

Chart To Watch - Apple - AAPL

GFT Inflation Indices

We are now focusing on June inflation data rather than March. GFT's prices suggest that UK CPI is still expected to be well above the Bank's 2% target rate by the end of June, and unchanged from March's reading. If so, this will be a disappointment for the MPC which has predicted a sharper slowdown in inflation. Yet the MPC decided to expand its asset purchae facility by £50 billion today. While this will help to keep gilt yields down, it also means that the Bank is intervening to a far greater extent than the US Federal Reserve as a percentage of the two countries' respective GDPs.

The ECB kept its minimum bid rate unchanged at 1%. However, it will also ease the requirements for banks making use of its Long Term Refinancing Operations. This has raised the expectation that the ECB will extend this facility significantly later this month.

Most Actively Traded Instruments

Index	Commodity	Equity
Germany 30 (.DE30)	Spot Gold (.GOLD)	Barclays (BARC.L)
US Wall Street (.US30)	Spot Brent Crude (.BRENT)	Vodafone (VOD.L)
US Tech 100 (.USTECH)	WTI Crude Oil (.WTI)	Apple (.AAPL)

UK and Europe

Market	Ticker	Price	Change	Percent
UK 100 Cash	.UK100	5895.0	+ 20.0	+ 0.33
Germany 30 Cash	.DE30	6789.0	+ 40.0	+ 0.59
France 40 Cash	.F40	3425.0	+ 15.0	+ 0.43

UK Market News

Asian Pacific markets were broadly flat overnight. Traders were unfazed by news of further delays in Greek debt talks and were equally unmoved after data showed China’s rate of inflation unexpectedly accelerated in January. CPI jumped to 4.5% from 4.1% in December, confounding economists’ predictions of 4%. Although this was a big miss, one cannot read too much into it as prices may have been temporarily increased ahead of the Chinese New Year. The Shanghai Composite eked out a gain of 0.1%, while the Australian S&P/ASX, Hong Kong’s Hang Seng and Japan’s Nikkei all edged lower by under 0.2%.

European stock indices opened higher this morning. But the gains were capped by further confusion and delays in Greek debt talks ahead of a meeting of eurozone finance ministers this evening. Expectations were falling that Athens’ debt deal will be sealed at this meeting after the country’s political leaders once again failed to agree on fresh austerity measures during talks yesterday. However, in the afternoon, risk assets shot higher as reports emerged that a deal has in fact been struck and that it will be officially announced at some stage in the evening.

Meanwhile the Bank of England and the European Central Bank have kept interest rates unchanged at 0.5 and 1.0 percent respectively, as expected. Also in line with expectations, the BoE has increased QE by an additional £50bn to £325bn. Other UK  data releases were generally positive today. Manufacturing production rose 1% in December following a decline of 0.2% the month before. Expectations were for a rise of only 0.3%. As a result, total industrial output increased 0.5% on the month after falling 0.6% in November. UK’s goods trade deficit narrowed to a 22-month low in December. This was due to a big drop in imports, as well as record foreign sales of oil and strongest ever exports to South Korea. The gap shrank to £7.1 billion from an upwardly revised £8.9bn, which was better than £8.5bn expected. Exports of goods increased 0.9% while imports fell 4.6%. Overall trade deficit, including services, was at its lowest since April 2003. Meanwhile the Council of Mortgage Lenders said a total of 36,200 homes were repossessed in 2011. This was the lowest annual total since 2007 and below the CML’s forecasts of 40,000. However the CML warned that there are wider economic difficulties in the UK and unemployment is still increasing, so repossession are likely to rise again this year.

In the afternoon, the FTSE 100 was back near its earlier highs as traders responded to dovish comments from ECB president Mario Draghi. Mr Draghi said the European economy should recover gradually this year and that stresses in financial markets had diminished in response to ECB measures. Meanwhile a number of companies reported their results today including BG, Diageo, Rio Tinto, Roll-Royce and Vodafone. BG (BG.L) said it expects to grow production at 7% per year to 2020, as it delivered a 43% rise in Q4 earnings and 34% increase in revenues. Rio Tinto (RIO.L) reported a 6% loss in second-half profits, although its revenues rose sharply and increased its dividend payout by a third. Rolls-Royce (RR.L) saw its shares fall almost 4% today even after reporting record earnings and sales. Diageo’s (DGE.L) half-year profits increased 15% as growing demand for its global brands in emerging markets offset poor sales in the eurozone. But Vodafone (VOD.L) reported modest revenue growth in the fourth quarter of 2011. The telecoms giant performed better across northern Europe and there were better results from emerging markets such as India and Turkey where sales grew more than 20%.

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US Indices

Index	Ticker	Price	Change	Percent
US Wall Street Cash	.US30	12,905	+ 23	+ 0.19
US 500 Cash	.US500	1,353.0	+ 3.0	+ 0.22
US Tech 100 Cash	.USTECH	2,565.0	+ 19.0	+ 0.75

US stock indices recovered from early losses yesterday to end the session in positive territory. But once again, the gains were meagre and volumes wafer thin, suggesting that the rally is running on empty and may take a reality check soon. So far this week, we haven’t had any significant economic data or any progress on Greek debt talks, which explains in part why trading has been quiet. The rally looks over-stretched and most leveraged traders don’t feel comfortable jumping on the bandwagon at this stage. Even the bulls would welcome some sort of a pullback or consolidation as that would attract fresh buyers into the market. But for now, stocks are continuing to climb the wall of worry, with the Nasdaq index closing at a fresh multi-year high yesterday. It ended up 0.4%, boosted by continued interest in Apple, while the S&P 500 eked out a gain of 0.2% and Dow edged up only by a few ticks.

US stock index futures were a touch firmer this morning, following strength in European equities. Once again, investors were waiting for news from Greece yet appear completely unfazed by further delays and confusion. But the waiting may finally be over now with reports suggesting that a deal will be announced at some stage this evening. Of far greater importance is the willingness of the major central banks to continue to hose liquidity into the market place. Today's meetings from the Bank's MPC and the ECB confirmed their ongoing interventions. The BoE increased QE by an additional £50bn while Mario Draghi, the ECB President, hinted at relaxing rules for banks taking part in a long-term refinancing operation. He also reminded us about the sector’s health, saying that the first tier LTRO has helped to avoid “a major credit crunch.”

This morning we saw the release of US weekly jobless claims and a number of corporate earnings reports. Claims came in at 358,000 but last week’s number was once again revised up a touch to 373,000 from 367,000. Nevertheless the number still beat forecasts of 369,000 even after taking the revision into consideration. Consequently, Wall Street opened a touch higher today.

Meanwhile in earnings we had mixed results in from the likes of Credit Suisse, Dunkin brands, Noble Energy and Pepsico. Among these, Credit Suisse posted a surprise quarterly loss while numbers from Cisco and Pepsico were better than expected. But shares in the latter fell after the company said its 2012 profit would decline by 5% due to increased advertising and marketing. Groupon, which reported its earnings last night, fell 10% as it posted an unexpected loss in its first quarterly results since going public. While the US earnings season continues to produce a mixed set of results, it has certainly been better than the European season so far. The big question now is whether the US equity markets still have the momentum to push higher from their present elevated levels.

Technical Outlook -

Commodities:

Precious Metals:

Market	Ticker	Price	Change	Percent
Spot Gold	.GOLD	1746.0	+ 13.0	+ 0.80
Spot Silver	.SILVER	3408.0	+ 11.0	+ 0.33

Precious metals were relatively quiet in early trade today. Both metals moved higher in the Asian Pacific session but then fell back during the European session. But buyers came in as the US opened and then gold and silver shot up during ECB president Mario Draghi's press conference following the central bank's rate-setting meeting. The rally in precious metals followed Mr Draghi's announcement that Greek policymakers had finally reached agreement over further austerity measures. The ECB kept its minimum bid rate unchanged at 1% although it signaled an apparent willingness to extend its Long Term Refinancing Operations later this month by easing the requirements for banks making use of the facility. Mr Draghi also emphasised that there was no stigma attached to any bank tapping the LTRO, although few players involved in the interbank lending market would agree with him. Gold is once again attempting to break above $1,750 while silver is struggling to hold on to $34.

Crude Oil:

Market	Ticker	Price	Change	Percent
Brent Crude Oil Spot	.BRENT	11840	+ 124	+ 1.06
WTI Crude Oil Spot	.WTI	99.90	+ 1.20	+ 1.21

Crude oil was firmer today. Brent continues to build on its recent gains since bursting above resistance formed by a downward-sloping trend line and the 50% retracement of the April-August 2011 sell-off at $113 per barrel. If it can continue to consolidate above $116 (the 61.8% Fibonacci retracement of the same move) then its next upside target is around $119.50 – a previous level of resistance going back to early 2011. WTI is now testing resistance at $100 per barrel. Both contracts were boosted by euro strength/US dollar weakness today following reports that Greek policymakers had agreed to additional austerity measures. A deal is required before the EU/IMF/ECB will release further bailout funds. The news that OPEC cut its global oil demand outlook and that Chinese inflation was higher than expected had little impact on prices. Instead, investors reacted to raised expectations that the ECB will increase its LTRO programme later this month.

Looking forward - Friday 10th February

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About The Author

David Morrison has worked in financial markets for over 25 years. He has been instrumental in setting up two spread betting companies. He has managed trading desks and has implemented and run successful risk-management strategies. He has appeared on Bloomberg TV and has written numerous articles covering economics and trading strategies using fundamental and technical analysis. He joined GFT in February 2009 to deliver commentary and research for derivatives products, and trades on his own account.