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Breaking News: Greece to present proposal

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At the time of publishing breaking news suggest that Greece will present a proposal to creditors. According to early sources that Greek plan will involve extending the international loan agreement. However, until a few hours ago Athens had been vocal that they would refuse any extension of the bailout deal. There are additional news that this proposal is very close to the one rejected by Eurogroup on Monday. With the only difference it is called a loan. EURUSD quickly rallied to 1.1412 on the positive development.Based on current information, we remains skeptical on the repackaged bailout plan.

Yet despite the continued impasse over Greece European financial markets remains subdued. Even the EURUSD which is slightly softer since the start of the weak is eerily range bound. As a functions of lemming like behavior in financial markets no one is seriously pricing in a “Grexit” since trading in highly probably makes most risk manager comfortable. Trading the tails is a dangerous game. So we get it, however, the probably of Greece becoming insolvent has increase significantly (well above the 20% advertise, in our view). Jeroen Dijsselbloem, Chair of the Eurogroup, threw down the gauntlet in say that Greece has to accept an extension of the current program. With no hint of any renegotiations. He went on to say that at the end of the week the ability to submit an applications for the extension of current aid program would end. Yet we doubt the Greek government would accept such a lack of comprise. As long the the possibly for a solution exists it’s unlikely that the ECB will end the emergence liquidity assistance (ELA) which is keeping Greek banks alive as they are facing serious liquidity issues. However, judging from Dijsselbloem timetable after Friday with, the ECB will have a hard time justifying continuation of ELA. In the past the ECB has bent all the rules for Greece but this time feels different , and unlikely the ECB will prop up this political circus. Cyprus folded under pressure from the ECB removing liquidity so the gamble to work again with Greece. The lack of reaction, baring deep sell-off in Greece debt, suggest either the market still believe in a last minute storybook ending or views collapse of Greece as inconsequential to the larger EU and EMU.

China

Economic data out of China continues to disappoint, however credit growth has accelerated suggesting the outlook should be less gloomy. We had anticipated that Chinese policymakers would not sit idle by and watch while economic growth slowed below targets. With credit rising for the third straight month, evidently policy measures are working to stimulate lending. New CNY loans continued to grow and total financing jumped to a ten-month high. New CNY loans are particularly interesting since these reflect activities in the real economy. In January, new loans grew to CNY1470bn from CNY697bn in December and above consensus expectation of CNY1350bn. However, China’s M2 growth slowed to 10.8% y/y in January from 12.2% in December. Entrusted loans (off-balance sheet lending) totaled CNY80.4bn and trust loans fell to CNY5bn, indicating efforts to shift away from “shadow banking” is progressing. Overall the data is encouraging. With inflation still an issue the effectiveness of past rate cuts has been minimized. So with economic data still soft we anticipate a least two more 25bp cuts in benchmark interest rates and two more 50bp cuts in RRR by the H2 2015. Our view remains constructive on the CNY despite current weakness. Our optimism stems from the belief that an aggressive cocktail of monetary and fiscal stimulus will jumpstart the Chinese economy.

FOMC

Outside of the fluid headlines emulating from Greece and international creditors, traders will also be watching minutes of the January FOMC statement. It will be interesting to view the discussion around certain phases such as “international developments” and “patient”, yet no real signal on timing is expected. Therefore market volatility should be limited. More likely Yellen’s congressional testimony next will could provide insight on to when the Fed is planning the first hike. That said, we should hear that the pace of US economic growth is solid, being led by job creation. It will be interesting to see any concern over the soft inflation reads. Overall, the minutes should be slightly more hawkish illustrating the Fed “patient” is waning

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