U.S. investors return to markets after a long holiday weekend today to find that few of the open questions facing markets as last week concluded have been resolved. Critically, the odds of a Grexit — a Greek exit from the euro — seem to be up. After reaching an impasse with his counterparts yesterday at the Eurogroup meeting, Greek Finance minister Yanis Varoufakis returned to Athens to face rapidly depleting public resources. European Central Bank policymakers will meet today to discuss badly needed liquidity funding for Greek banks. Despite increased fears of a Greek exit from the currency union, the euro remained relatively calm in overnight trading against the currencies of primary trading partners. In a note to clients this morning Société Générale strategist Kit Juckes commented, “From here, uncertainty reigns but even if talks go to the wire, successfully kicking the can down the road and agreeing to a deal, would be euro-positive for a while,” going on to add, “By contrast, failure to agree on a deal this week will see a renewed round of Euro weakness and the odds of that happening are increasing.”
Fighting resumes in Ukraine. Ukrainian authorities announced that five government soldiers were killed and an additional 25 wounded as fighting in eastern Ukraine resumed despite a cease-fire that went into effect Sunday. Russian-backed rebels blamed the fighting on aggression by Kiev-directed forces. In response to the escalated conflict, the European Union has announced additional sanctions against individuals and entities in Russia, sparking an angry response from Kremlin spokespersons.
Japanese GDP softer than expected. As forecast, Japanese GDP for the final quarter of 2014 rebounded from contraction. At 2.2 percent annualized, growth levels were much weaker than anticipated as household spending remained anemic. Equity markets shrugged off concerns however, with Japan’s Nikkei 225 index reaching its highest level since July 2007 in trading on Monday.
Chinese housing prices slump. The pace of contraction in prices picked up in January for the 70 cities tracked by the National Bureau of Statistics, according to data released yesterday. While the average declined by 5.1 percent, primary coastal cities fared somewhat better as buyers there took advantage of recent moves by the People’s Bank of China to loosen mortgage rules.
Deflation stalks the U.K. Consumer price inflation index levels for the U.K. reached a record low in January, according to Office for National Statistics data. Headline prices grew at a pace of 0.3 percent for the month, as food and fuel costs continue to contract. Bank of England governor Mark Carney stated in comments after the bank released official inflation projections last week that prices may contract in the coming months.
Portfolio Perspective: Limited Upside Potential in Long-Dated Bonds — Karl Haeling, Landesbank Baden-Württemberg
The Treasury market did not perform particularly well after the 30-year bond auction ended. There was sufficient investor buying in last week’s Quarterly Refunding, however, suggesting improved odds for the recent bearish phase to shift into a sideways consolidation pattern. Overall, fundamentals remain supportive for ten- and 30-year paper. Yet there was bullish price action in equities, increased signs of a bottoming pattern in key commodities and bearish prospects for short-dated Treasuries. The likelihood of tightening by the Federal Reserve this summer should limit upside potential in long-dated bonds for the time being.
World economic and political conditions are volatile enough that things could quickly change, of course. For one, we are skeptical that the Russia-Ukraine conflict has been solved. The last cease-fire there last fall only lasted a couple of days — if that long.
The Greek debt payment situation is somewhat more uncertain to us. While it seems logical for both sides to reach a compromise and a market-friendly agreement, there are many volatile elements in the negotiations. Traders worry that capital controls would become the base scenario if both sides don’t compromise.
Karl Haeling is a vice president of capital markets at Landesbank Baden-Württemberg’s New York office.
