Just when you thought it was safe to go back into the water, SNAP SNAP.
Here we go again. The Greeks (I have many Greek friends) I’m afraid have hit the brakes and set in motion another Eurozone crisis. It is ironic that the last Greek crisis took place 5 years ago almost to the day!! As Greece’s finance minister warned, the ECB could “strangle the Greek economy in a split second” if it cuts off life-support for banks. What this all means in a nut shell is the EU’s ongoing crisis has returned with a vengeance as snap elections open the door to the left-wing Syriza party (Anti-Austerity) coming into power and setting up a showdown with the ECB over the terms of Euro membership, not to mention the threat of leaving the EU and the EUR common currency.
Greece’s stock market fell 10% (recovered somewhat) while the 3-year bond yield rose an eye-watering 185 points to 11.90%. The hard liners from the Syriza party have vowed to tear up Greece’s hated ‘Memorandum’ with EU-IMF Troika creditors “on its first day in office”, and threatened to default on up to €245bn of rescue loans unless the EU grants debt relief. Leading by 29.90% to 23.4% in the polls, the prospects of the above happening grow by the day. If the worst case scenario does happen it will be the first time a truly “radical hard-line” group has led a Govt. since the monetary union was created. German finance minister Wolfgang Schauble warned the Greeks not to play with fire by pressing for impossible demands. “Fresh elections won’t change Greece’s debt. Each new government must fulfill the contractual obligations of its predecessors. If Greece chooses another way, it’s going to be tough,” he said. The IMF said Greece faces “no immediate financing needs” yet the issue will turn serious once Greece runs out of Troika money in February. “We could have a problem at the beginning of March,” said finance minister Gikas Hardouvelis. It will be even more serious in July and August when Greece must repay €6.7bn to the ECB. Capital markets are effectively closed. Joschka Fischer,the former German foreign minister, said northern Europe cannot give ground to Syriza without causing EMU discipline to break down. “Any renegotiation would unleash a political avalanche in the southern EU that would sweep away austerity and reignite the eurozone crisis,” he said.
While Greece’s economy has stabilized after contracting by 25.7% in a six-year depression, the damage has been enormous and caused pervasive cynicism over EU claims. Investment has fallen by 63.5%. Unemployment is still 25.9%. Troika loans have left the country with a public debt 177% of GDP, even after two “haircuts” for private creditors. Everything now hinges on the ECB. They HAVE to come out with all guns blazing and launch a MEANINGFUL QE programme. The half hearted measures to date are simply “not good enough”. Simply put, unless they pull out all the stops the market will hammer the EUR and Greek (Italian/Spanish/French) bonds. We are entering a CRISIS except this time the ECB could very well be sitting around a table with uncooperative and hard line partners. My comments yesterday about EURUSD moving towards PARITY and the prospects of €/$1.00:1.00, become more and more realistic!!!!
Looking at today’s economic calendar, investors will be focusing on December’s US Consumer Confidence reading. Expectations point to a print at 93.7, putting the index within a hair of the seven-year high at 94.1 recorded in October. US economic data has improved over recent weeks/months, hinting that the FED will hike rates BEFORE the anticipated dates hinted by Economists. We have said the 1st hikes could come around the end of Q2 (May-June) while the observers have said more like Sept. 2015. As the data proves the US economy is strengthening by the day, the FED might well be forced to hike and put us all out our misery. EURUSD fell from 1.2225 (pre-Greek announcement) to 1.2150 currently (1.2123 lows). If all goes well over the next 36 hours MAYBE JUST MAYBE MY (ORIGINAL) CALL (IN JULY 2014) FOR €/$1.2000 BY 31 DECEMBER 2014 WILL BE REACHED!!!
GBPUSD remains on a 1.55 handle though the prospects of the USD breaking towards 1.2000 (EUR) opens the door to further loses though potentially not as bad. Given the state of the UK economy while the USD should rally vs the GBP it will be a trickle rather than a burst. The GBP vs the EUR though is fairing nicely trading around 0.7830 (1.2770) with the prospects of 0.7700 (1.2990) evenly poised.