Greece running out of time to produce a comprehensive list of reforms

Late last week, Greece submitted the third iteration of the list of proposed reforms demanded by eurozone finance ministers as a pre-condition for the payment of the outstanding tranche of €7.2bn from Greece's second bail-out.

However, the list has been dismissed as "a set of ideas" by some euro-zone officials, who are reportedly awaiting a more comprehensive and detailed version in the next few days.

Greece is running out of time to produce a list of reforms that will satisfy its creditors and secure the additional bail-out payment it requires to meet its near-term financial obligations. But even if it is successful, the much more daunting challenge of finding a lasting solution to the country's unsustainable debt burden will still lie ahead.

"Even if Greece manages to secure its remaining bailout payment, this will provide nothing more than a stop-gap, and a short one at that. The much bigger challenge of finding a lasting solution to Greece's debt problems will still lie ahead.

We continue to believe that only a major debt write-down can ultimately provide that solution, a prospect Greek Prime Minister Alexis Tsipras has recently begun to talk about again. But it remains doubtful that this will be achievable as long as Greece remains inside the euro.

In short, we maintain the view that the markets are under-estimating the likelihood that Greece leaves the euro at some point, and the potential financial and economic effects of such an event." - said Capital Economics in a report on Monday. 

European confidence review

European Central Bank's (ECB) asset purchase program has pushed confidence across and beyond the region. Consumer, industrial, services all painted bullish mood across the zone.

• Consumer confidence rose to -3.7 from previous -6.7. In December 2014, it was close to 12.
  
  
• Business climate indicator rose to 0.23 from previous 0.07. It has been falling since November 2014 until latest release today.
  
  
• Economic sentiment across EMU rose to 103.9. This is a consecutive rise of four months.
  
  
• Industrial confidence rose to -2.9 from prior -4.7. This is a second consecutive rise.
  
  
• Services confidence rose to 6 from prior 5.3. The index posted fourth consecutive rise.

Impact -
Indicators across EMU suggests that ECB's monetary policy easing through asset purchase is sipping in through real economy and boosting confidence pan industry.

However Euro's reaction is somewhat mute over the release, currently trading at 1.086. Most of the benefits of improved condition and weaker Euro will be enjoyed by the stock market. European stocks remain relatively cheaper and has a lot of scope to move up.

11th hour negotiations continue in Greece

Negotiations continued over the weekend between Greek officials and Euro zone inspectors known as Brussels Group that comprises of ECB, IMF, European council and ESM. Talks lasted several hours and on Saturday for consecutive 10 hours at one stretch.
Latest information suggest positive improvement over some aspects, however a lot remain yet to be covered.

Key highlights -

• Greece has so far given up on two of demands of creditors - increasing VAT on Greek Islands and to retain property taxes that has been very unpopular among public. These measures are expected to increase revenue by € 2.5-3 billion.

• However, significant gap still remains over labor laws and pension reforms.

• Brussels group officials still thinks the latest list provided by Greek government is still too vague and lack further specification on how the measures would be achieved.

Greek Prime Minister Alexis Tsiparas has called the lawmakers on a special meeting at 8pm Athens time today, where he will be briefing about latest weekend negotiation and stance of his government.

• Greek is not very far from running out of money, probably by 8^th April and before the payment of € 0.45 billion to IMF on 9^th. Greece can avail the remaining € 7.2 billion from current bailout fund upon successful agreement over reforms. Government has taken today as a deadline to finalize the deal, however negotiation might get extended.

Euro is currently trading 1.085 and might receive a boost from successful deal which seems to be underway but might take some more time.

Today is all about central bankers

• European Central Bank (ECB) governor Mario Draghi is scheduled to speak today at 14:00 GMT in the event of the release of a new € 20 bank note in Frankfurt.

• Federal Reserve (FED) governor Janet Yellen is scheduled to speak to lawmakers at bi annual event to testify before congress in Washington. This is a two day event. Today it is expected to start at 15:00 GMT.

• Bank of Canada (BOC) governor Stephen Poloz is scheduled to speak at a press conference at 19:00 GMT.

Analogy & expectation

• Much is not expected from ECB as Mr. Mario Draghi hardly comments out of the line and on monetary policy in an event of such kind.

• Lot is expected from governor Yellen as she faces scrutiny on various aspects beyond monetary policy. Market will be searching for any queue regarding the first rate hike. Nevertheless her view on different segments like labor and housing markets as well as falling inflation expectation will be vital to assess the future path of monetary policy. Usually in terms of market movement, first day comments from the event are more pivotal.

• Speech from BOC governor will also be of high importance, as he usually provides queues of monetary policy expectation. In recent time, BOC has reduced the rate by 25 basis points to 0.75%. Vital would be his view on the minimum threshold level for the interest rates & the tools the bank is considering in its pledge for easy monetary policy.

Yellen Heading to the Senate

All eyes will be focused on Federal Reserve Chair Janet Yellen as she presents the semi-annual monetary policy testimony to the Senate Banking Committee. I anticipate that she will stick to an economic outlook very similar to that detailed in the last FOMC statement and related minutes. Expect her to indicate that the Fed is closing in on the time of the first rate hike - after all, this was clearly the topic of conversation at the January FOMC meeting. I anticipate the "Audit the Fed" movement will be on display in the Q&A, which will provide Senators the opportunity to display their ignorance of monetary policy. And with any luck, we will learn how "patient" the Fed really is.

That said, I am wary of expecting much in the way of insight on "patient." The Fed has trapped itself with that language, and I am thinking that it will take the collective power of the FOMC to devise a way out. And they have little choice but to deal with that issue at the March FOMC meeting. The basic problem is this: The hawks would be happy with pulling the trigger on 25bp at the March meeting. The center isn't ready to go along with that, but they want the option of being able to pull the trigger in June. But Yellen, in trying to signal in December that a rate hike was not imminent, linked the term "patient" to two meetings. So if they keep "patient" in the statement, it seems to imply that June is off the table, but that message will brings squeals of unhappiness from the hawks and even leave the center uncomfortable. But just pulling "patient" risks leaving the impression that a June hike is a certainty, which is a message the center doesn't want to send.

If you think this is a dumb way to manage monetary policy, you are correct. Now that the Fed is closer to meeting their employment mandate, they simply cannot credibly signal intentions six months in advance. They need to let the data start doing the work for them, but don't know how to make that transition.

It something of a shame that Yellen couldn't leave well enough alone in December and let financial market participants believe that "patient" would be used as it had been in 2004. In that case, "patient" would have no time horizon other than that dropping the word "patient" meant that a rate hike was likely just one meeting away. They could credibly manage such a signal. Anything more than one meeting ahead is problematic.

On the economic outlook, I would say that if Yellen were to deviate from the January FOMC meeting, it would be in a generally positive direction. I think they will take the subsequently released upbeat employment report as strong evidence that underlying trends remain solid. The news that Wal-Mart is raising salaries will likely be viewed as just the tip of the iceberg. I doubt anyone on the FOMC believes Wal-Mart leadership acted out of the kindness of their hearts. Yellen herself will probably think something to the effect that "I told you that the quits rate was important."

Assuming the Greece situation holds together for another 24 hours, that coupled with easing by global central banks in recent weeks will lead FOMC members to believe that global risks have dissipated. And to top it off, US equities pushed back to record highs. What's not to like? Maybe the GDP numbers, but Cleveland Federal Reserve President Loretta Mester gave what I think is the consensus view on the topic:

WSJ: Putting aside the tailwinds that you’re seeing. The growth data look a little soft at the moment.
MESTER: Not really. The fourth quarter came in after two quarters of really robust growth. The employment report actually was revised up for those last couple of months. There is this tendency to look at the last data point. I’m just not that concerned. I think we’ve seen growth pickup. I think there is more momentum in the economy.

Hence why I also don't agonize about what a snowstorm means for monetary policy. It means nothing.

There is plenty on the docket beyond Yellen this week. Existing and new home sales, consumer confidence, regional Fed manufacturing indexes, durables goods orders, CPI, Case-Shiller, GDP revisions, and, if that weren't enough, speeches by Fed Presidents of Atlanta (Lockhart), Cleveland (Mester), and New York (Dudley), and Federal Reserve Governor Stanley Fischer. The fun just won't stop!

Bottom Line:  I expect the Fed will continue to walk the fine line between keeping June in play while signaling that the data will soon justify a rate hike though not necessarily in June. And watch for signs of an effort to shift the focus to the expected gradual pace of rate hikes in an effort to minimize adverse market reaction to the possibility of June. Expect generally positive views of recent data; the Fed thinks the economy is finally on the right path.

Source : Timduy

FED to tighten policy – monetary base edition

The chart shares the size of the US monetary base since 2007.
Key notes -

• Aftermath of great recession of 2008, US Federal Reserve announced (FED) its asset purchase programme also known as Quantitative Easing (QE). Since 2008, FED announced targeted QE as well as open ended programme.

• In 2014 the FED has completed its purchase programme and expressed its desire for tightening through raising interest rates from record low near zero.

• So far it has not declared to shrink the balance sheet which it will eventually at a later date. Clearing up the balance sheet would be more bullish for the US dollar and may not be good news for the stock market and especially bond market. Despite so some shrinkage appears in the sheet which could be due to expiring tenure of the securities held.

Analogy -

• FED has now ever more power to influence the value of the Dollar and bonds with staggering balance sheet size of $ 4 trillion.

• Despite the tightening, stock market is expected to head higher, riding on the positive economic growth.

• Concerns are there over the bond market liquidity but it is fair to expect that the FED will eventually manage to shrink the size of the base.

Under such circumstance Dollar is expected to perform well against majors and emerging economies.

Greece secures bailout extension, more negotiation ahead

Greek government and the Euro zone creditors have secured a deal of bailout extension of 4 months in late Friday. Important takeaways-

• Greek government will get the rest € 7.2 billion aid package, the final tranche of current bailout programme if the deal is successful.

• To secure the bailout extension the Greek government will be required to come up with a series of reform and budget cuts to TROIKA (ECB, IMF, European Commission) today, 23^rd February.

• Tomorrow, 24^th February European finance ministers will reconvene to finalize the deal.

• A success deal would keep the Greek government, especially the banks afloat in the midst of a heavy deposit withdrawal of approximately € 2 billion/week.

• Despite the scheduled time frame, a negotiation could extend beyond Tuesday as the bailout officially does not expire till February 28^th.

The Euro has taken the news with pinch of salt, currently trading around 1.135 against the Dollar. The pair is still treading water within its tight range of 1.127-1.145. Depending on the outcome the pair could move into its larger range of 1.11-1.165.

Europe grows – PMI shows evidence

Despite the bearish outlook maintained over Euro, it was reiterated that better data is coming out of Europe. PMI data for European Monetary Union was released today at 9 GMT.
Key figures -

• Latest PMI figure is 51.1 compared to 51 prior for the Euro zone, though market expectation was of a better reading.

• It is worth noting that the overall EMU PMI did better, when the reading from Germany faltered at 50.9 against an expectation of 51.5.

• France, Euro zone's second largest economy is not performing well and also behind the economic reform compared to many of its partner. Growth in France dropped faster than anticipated as evident from the latest PMI figure which stands at 47.7, even worse than prior 49.3.

• During the same time industrial data was also released that showed that Italy another large but troubled economy experienced growth, 5.8% YoY and 4.5% mom.

 Improving data and growth divergence will be of greater importance in the coming days as stock and bond performance might diverge in the Euro zone.
For now the effect of the data on Euro should be minimal as other pressing concern like Greece & ECB bond purchase remains the focus.

Hedging EURUSD position using FX Options ahead of ECB Jan meeting minutes

At 12:30 GMT today, the European Central Bank (ECB) will announce their monetary policy stance; a review of the EU's financial situation and monetary developments.

Yesterday the ECB agreed on raising the available emergency funds for Greece to $78 billion although some of its members were, and still are, against this action.

Today's speech is likely to affect the volatility of all related markets. Specifically in the FX market and EURUSD may see some fluctuations in either direction.

Currently EURUSD is around 1.1400, 100 pips above its rate from the beginning of the month and nearly 300 pips above its rate in the last week of January.

If you are currently long the currency and want to avoid being stopped out on a day like today you can limit your exposure  through buying a weekly EURUSD Put option which expires tomorrow at 15:00 GMT.(MT4 symbol: P#EURUSDw+0)

Check out graph of the EURUSD Put, strike = 1.1408. Price of the Put on a 1 lot = $400
The purchase of this Put will protect your long EURUSD spot position if the EURUSD rate falls below the strike (1.1408).

The scenario chart shows the Put options payout at expiry (15:00 GMT tomorrow) over a range of market rates. Notice how the Put pays-out as EURUSD rate falls.
The vertical axis is the payout from the option and the horizontal axis is the EURUSD rate.

Source: ORE,com