Headline roulette kept trading choppy this week as Euro Zone nations struggled to work out a plan to deal with Greek debt issues. Conflicting statements from a full range of European politicians and central bankers left markets grasping for details on what form the Greek support package would take. EU Commissioner Almunia stated there were clear risks of spillover from the Greece crisis among other EU members, and traders watched developments in Spain and Portugal closely. With Greece providing a grim example of budgets gone bad, many commentators took the opportunity to question US spending priorities and debt levels. PIMCO's El-Erian stated that while the situation of the US is not comparable with Greece, there are elements of the US position that are similar. The US calendar was light of market moving economic data, while a massive blizzard put Washington DC and most of Federal government out of commission, leading to the postponement of several data reports. Fed Chairman Bernanke's appearance before the House Financial Services Committee was cancelled, although the Fed released his prepared testimony, which confirmed that tightening would begin with the discount rate and that TAF and TALF special loan programs would expire in June as planned. However, he also reiterated that low rates are still warranted for an "extended period." FOMC voting member Bullard later suggested the Fed could begin to sell some assets as early as the second half of this year, and that any spike in inflation expectations would cause the Fed to tighten policy even if the unemployment rate is still high. Meanwhile, policy tightening continues in China, where the PBoC increased its reserve requirement ratio by 50bps for a second time this year. Equities markets were choppy all week, but were eventually led higher by strength in the tech sector. For the week, the DJIA rose 0.8%, the Nasdaq gained 2%, and the S&P500 added 0.9%.

The Greek tragedy reached a key turning point this week. After ECB Chief Trichet abruptly left a conference in Sydney on Tuesday, a day earlier than originally expected, speculation erupted that emergency meetings were being convened in Europe to work out a rescue package for the besieged Hellenic Republic. German officials seemed to take the lead, with direct measures (such as outright bond purchases or loans) and indirect measures (such as loan guarantees) both apparently on the table. Focus quickly shifted to Thursday when a previously routine meeting of the EU council in Brussels was scheduled. With questions lingering over the legality of an EU bailout, a bilateral approach driven by Germany and France was shaping up as the most likely outcome, although chatter over some form of IMF involvement remained. Heading into the meeting anticipation was building for some closure but traders were ultimately left scratching their heads as, save for the usual expressions of solidarity and support, few concrete details emerged. According to the European press, German Chancellor Merkel, perhaps realizing that asking Germans to foot the bill for Greek largesse may be political suicide, wasn't even willing to discuss a bailout, and was instead focused on ensuring Greece was compliant with the pledges laid out in its recently announced Stability Plan. With around €7B in the Treasury's coffers, Greece faces two large bond redemptions of about €20B in April and May. If EU finance ministers can't thrash out a concrete deal at a meeting of finance ministers on Tuesday next week it seems contagion fears may persists.

Equity news was relatively thin this week, featuring quarterly reports from a variety of consumer-oriented companies. CVS and Disney topped expectations, while Pepsi and Coca-Cola met analysts' expectations. Marriot's results were slightly ahead of expectations, however the firm refrained from offering revenue guidance for next quarter and warned that full-year REVPAR would be flat or down. Media names New York Times and IAC Interactive both modestly exceeded targets, although Times executives warned that that visibility remains limited for advertising and internet ad revenue would be flat next quarter. Sprint reported a bigger than expected quarterly loss and revenue below consensus. On the bright side, wireless customer losses were at their lowest level in a year, and Sprint executives assured investors that the company's revenue declines are bottoming out. Insurance name Allstate beat slightly, while rival Prudential missed on the bottom line. Manufacturer Ingersoll-Rand missed earnings estimates and offered an extremely weak Q1 forecast. Biogen Idec crushed its earnings expectations and offered strong 2010 guidance.

US Treasury markets experienced mostly isolated flows this week, avoiding Europe's headline roulette and all the resulting shifts in risk appetite. Yields pushed higher for the better part of the week as traders refocused on supply/demand factors in the $81B in auctions on the Treasury's calendar. By Thursday yields at the long end of the curve were approaching 1-month highs and the 2-yr/10-yr spread had widened back out toward the steepest levels on record. Following a disappointing reception of the 10-year auction on Wednesday, 30-year paper required nearly a three basis point tail and nearly a quarter of the offering went to direct bidders. Declining indirect awards and unusually high directs continue to spark concerns as to who is buying and how that demand will be sustained going forward. Regardless, prices bottomed out Thursday afternoon as traders who sold ahead of the supply attempted to buy the news. Friday's session saw rates retreat even further, buoyed by some early weakness in equities. By week's end, the 30-year yield traded some 8 or 9 basis points below what Thursday's auction drew.

The greenback maintained a very firm tone in currency trading this week, hitting multi-month highs against numerous pairs, particularly the euro and Swiss Franc, as the euro suffered from the tepid remarks that streamed out of various European officials and central bankers all week long in regards to Greece. The lack of clarity on the issue gave traders plenty of reasons to sell the European currency, and the softness will likely continue until concrete details of a fiscal resolution plan for Greece are firmly communicated. Note that the CFTC Commitment of Traders report for the week ending Feb 2nd showed the number of euro short contracts hit multi-year highs. In the back half of the week, chatter intensified regarding an alleged option barriers around the 1.3500 level.

A raft of disappointing European preliminary Q4 GDP figures out on Friday accentuated the headwinds facing most European nations in their quest to satisfy Maastrict stability criteria. The potential for continued sluggish economic growth will weigh upon government tax revenues and increase pressure to further cut spending to fulfill membership criteria. Both the G7 and the IMF took the opportunity to reiterate that nations must maintain stimulus spending in order to support economic recovery.

Poland's Finance Ministry issued a new EMU convergence plan that sees a budget deficit under 3% by 2012 and government debt not exceeding 55% of GDP in the 2010-12 period, according to Polish accounting standards. The debt-to-GDP level would hit 56.3% 2011 under EU rules. The plan decided against setting a new target date for adopting the euro. The government originally wanted to replace the Polish Zloty with the single currency in 2012.

In the UK, the BoE inflation report sent GBP/USD lower after testing the pivotal 1.5750 against the dollar. Sterling had benefited from the euro's woes but remains range bound against the dollar.

The Chinese currency issue may be simmering once again as both US and Chinese officials traded rhetoric on where the yuan FX rate should be. President Obama reportedly set a year-end goal for China to allow the yuan to appreciate, while the PBoC stressed that a stable yuan is best for China and the world. Also note that China's PBoC increased its reserve requirement ratio by another 50bps.

In Australia, the case for continued RBA rate tightening was bolstered by surprisingly strong January jobs data. Unemployment unexpectedly fell to 5.3% from 5.5%, while net new jobs figure registered its biggest monthly gain since December of 2006 at +52.7K. Just ahead of the data, Australia's Treasury warned that it was unsure whether unemployment rate has peaked at the 5.8% seen three months ago. Nonetheless, the Aussie outperformed broadly against other majors, rising above 0.89 vs USD for the first time in a week. Monetary policy meeting minutes as well as some key speakers from the central bank take the stage next week, likely offering the markets a clearer outlook for the March 2nd RBA decision.

China's January trade data denoted a further shift in favor of an economy driven more by domestic consumption than external demand. The trade surplus fell for the third consecutive month to a 4-month low of $14.2B, but imports grew at a multi-year high rate of 85.5% y/y. Slightly less impressive, exports grew at a 16-month high of 21%. Sequentially, trade activity did see a seasonal decline in January ahead of the Lunar New Year celebration, as imports fell 0.9% and exports fell 5.5% on m/m seasonally adjusted basis. In other notable Chinese data for the week, consumer price index fell for the first time in 6 months to 1.5% y/y, below the expected 2.1%. Economists downplayed the drop by pointing to the seasonality of the Chinese New Year falling on January in the prior year, and warning that February data runs the risk of exceeding expectations.

In Korea, the central bank left interest rates unchanged at 2.00% as expected, citing considerable uncertainties over economic growth and further turbulence in financial markets because of European sovereign risks. The central bank noted policy would remain accommodative to sustain economic recovery. Subsequently, Bank of Korea Governor Lee said the central bank is mindful of the low rates' side effects, warning rates would rise when economic conditions return to normal. However, South Korea's January unemployment rate rose to a 10-yr high of 4.8% from 3.5%, dampening expectations that the Bank of Korea could become the next G20 body to tighten rates.

Trade The News Staff
Trade The News, Inc.

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