Europe, US Risk Off After Greece Rejects European Ultimatum, Ukraine Peace Talks Falter
In the absence of any notable developments overnight, the market remains focused on the rapidly moving situation in Greece, which as detailed over the weekend, responded to Europe’s Friday ultimatum very vocally and belligerently, crushing any speculation that Syriza would back down or compromise, and with just days left until the emergency Eurogroup meeting in three days, whispers that a Grexit is imminent grow louder. The only outstanding item is what happens to the EUR and to risk assets: do they rise when the Eurozone kicks out its weakest member, or will they tumble as UBS suggested this morning when it said that “the escalation of tensions between the Greek government and its creditors is so far being shrugged off by investors, an attitude which is overly simplistic and ignores the risk of market dislocations” while Morgan Stanley adds that a Grexit would likely lead to the EURUSD sliding near its all time lows of about 0.90.
That, the ongoing Ukraine “peace talks” which are rapidly going nowhere and in fact have already managed to splinter Europe and the US (as well as sow internal European discord) and the collapse of Chinese imports, and weaker than expected exports, reported over the weekend leading to a record high trade surplus, is what is on traders’ minds this morning.
As a result European equities (Eurostoxx50 -1.21%) trade in the negative territory across the board with concerns and uncertainty surrounding Greece weighing on sentiment after Greek PM Tsipras rejected terms on the bailout extension. This also supported a bid in core fixed income as Bunds trade with gains of over 50 ticks breaking above Friday’s high, with the prospect of lower bond issuance this week also supporting upside. The GR/GE 10Y spread is wider by around 68bps and ASE down over 5% indicating the dampened optimism in Greece after being downgraded at S&P to B- from B whilst Moody’s put the country’s Caa1 rating on review for downgrade on Friday. Weakness in equities was further exacerbated after reports that Hannover, Hamburg & Stuttgart airports face delays due to strikes sent DAX heavyweight Deutsche Lufthansa (-2.4%) lower and caused selling in the DAX (-1.52%) after a technical break below 10,700. Furthermore, the DAX was further compounded by JPMorgan downgrading the index.
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