Risk sentiment is back. Stocks are rising in Europe, oil is rallying and US Treasury yields have bounced off of their lows. One of the reasons for this shift in market psychology is Greece. The market panicked after the left-wing Syriza party won the majority of the votes and managed to form a coalition. After a week of trading insults and threats it looks like the Eurozone paymasters and the new Greek government are finally ready to compromise, the better tone to the conversation is reflected in the performance of the Athens stock exchange, which has rallied more than 10% on Tuesday, to a 7-day high.
Greece debt plan explained:
The new Greek finance minister Yanis Varoufaskis, has outlined a plan to swap Greek debt owned by the European authorities for new securities that are linked to the country’s growth rate. In essence the plan means that Greece would pay back more of the loans when growth was high and less if growth tumbled. This would avoid Greece having to instigate haircuts on its lenders, something that was deemed unacceptable, especially by Germany.
While the financial market is finding something to celebrate in Greece’s new plan, we still don’t know what its lenders think of the idea, most notably Germany. Yesterday a German government spokesman said that they were waiting for Greece to present its plans, and there were no concrete plans for Angela Merkel to meet the new Greek PM at this stage, even the German and Greek finance ministers have no firm plans to meet.
Added to that, we don’t know how the credit rating agencies would act. Would linking Greek debt to economic growth trigger a rating downgrade? Credit default swaps on Greek sovereign debt remain at their post-election highs, suggesting that the bond market remains wary.
The immediate problems:
Greece has a hefty debt repayment schedule this year, this month it owes over EUR 2bn, in the following 8 months it will owe nearly EUR 20 bn in principle only, an extra EUR 2bn needs to be included for interest. Yet Greece is running out of money, and badly needs its next tranche of bailout funds due at the end of this month. Thus, the market euphoria may not last long if Greece can’t pay its bills and Germany doesn’t acquiesce to changes in the Greek bailout plan.
EURUSD: the technical view
For now the single currency is enjoying the risk on tone to the markets and is testing a key level of resistance (see figure 1). The latest CFTC EUR positioning data found that short EUR positions vs. the USD were at their lowest level since mid-2012. When positioning data reaches extremes it can suggest that the market is too stretched to the downside, and the EUR could see a short-term reverse in its established trend.
The technical picture also suggests that this pair has made a short-term low at 1.1098 – the low from 25th Jan. The recovery rally could enjoy a leg higher if it can break above 1.1368 – a declining trend line – see the chart below. Above here further resistance can be found at 1.1423 and 1.1460. Initial support lies at 1.1262 – the low from 29th Jan, and then 1.1224 – the low from 27th Jan.
- Greece has suggested swapping bonds owned by the European authorities for securities that are linked to Greece’s economic growth. This could reduce the need for debt write-downs and haircuts.
- The market likes what it hears, and Greek stocks are up 10% today.
- However, we still don’t know if the European authorities will agree to the plan, or what this means for Greece’s credit rating.
- Greece is still at risk from running out of money, so the market could be getting ahead of itself.
- This has helped EURUSD to continue to consolidate.
- 1.1098 looks like solid support for now.
- In the short term we need to get above 1.1368 – initial resistance – to see a sustained rally in this pair.