Week End Blog – A Greek Roller Coaster

Markets have entered a roller coaster phase, caused by Greece. Things started positive this week with Mr. Varoufakis stating that Greece will no longer pursue a debt write off, but some kind of debt swap. That message got a warm welcome in the Greek equity markets which, at some point, made up all the loss that occurred after Syriza won the elections.

But, as in a roller coaster, things change quickly. After s short tour around Europe, Syriza must have realized things are easier said than done. Since Greece has opted to renegotiate its program, the ECB had to remove the waiver on Greek collateral. The ECB stated that the ‘decision is based on the fact that it is currently not possible to assume a successful conclusion of the programme review.’ And so, Greek banks got hammered again.

And interest rates rose sharply.

It seems we will be stuck in this Greek roller coaster for some time. Greece will run out of money early March and by the way things are going now, volatility could stay.

Greece is not yet without friends, however. France has made clear it would embrace negotiations to ease the Greek debt burden. And Mr. Putin has invited Mr. Tsipras to come and visit Russia, as they share a history of  defaults and both are dealing with current bond yields way above 10%.  Lots of stuff to talk about, I presume.

There are also differences between the two. The Greek economy is actually growing while GDP in Russia will collapse. Russia’s Manufacturing PMI fell to crises levels and the economy could shrink 5% this year.

The situation with Ukraine is also worsening again. News flashes that violence is flaring up are increasing. This week Ukraine had to let its grip on the currency go. The hryvnia plunged 40% on the day as talks of another IMF bail out  have commenced.

In other parts of Europe things look much brighter. Euro zone retails sales rose the most since 2007. Compared to a year ago sales went up 2.8%, a very impressive number from an European perspective.

The true star of the Euro zone, at least for now, is Spain. After a very impressive GDP growth of 2.0% YoY, PMI indices spiked and company earnings surprised on the upside. Spain is flourishing.

No Week End Blog is complete without bond yield items. And this week  brought yet another milestone. For the first time in history the German 10-year government bond opened below the 10-year bond yield in Japan.

But that’s nothing compared to Switzerland where you have to pay interest on bonds with a maturity of 10 years (and even a little bit longer). Denmark is trying to catch up as its central bank lowered short-term rates again. But for now, Switzerland is the ultimate example of ‘Japanification’.

Which means that certain Swiss companies, like Nestle and Roche, can now practically borrow for free. That can not be bad for earnings, right?

Time to leave Europe behind. China lowered the required reserve ratio for banks this week, effectively increasing liquidity by more than RMB 600 billion. It will probably not be the last RRR cut as GDP growth is slowing. Also, given the current level of inflation, interest rate cuts are on the table as well. The difficulty, again, will be how to steer the liquidity boost towards the parts of the economy that can deal with it. That would be consumers and service industries and not manufacturing, real estate and equity markets. China will have another busy year managing its economy.

In the US the ISM Manufacturing came down for a third consecutive month and now stands at 53.5. This time cold weather can’t be blamed and together with the below expected GDP numbers you may start to wonder what is going on.

Inflation will not be a reason to raise rates anytime soon. US Inflation has stayed below the Fed’s target for more than 2.5 years now.

But jobs are. The nonfarm payrolls reported another solid growth in January and previous months were revised upward. In November more than 400K jobs were created. That’s just massive and puts the Fed in an even more awkward position. Especially since wages are catching up as well. From a job market perspective the Fed should hike!

Unfortunately, I have to end this Week End Blog with a negative note. The New England Patriots won the NFL Super Bowl in a historical game. This year the The Vince Lombardi Trophy goes to a team from the AFC. And that is the wrong division for stock markets. Historically, returns have been below average when an AFC team wins.

Thank you for reading the Week End Blog. Enjoy your weekend!

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