Market Drivers November 21, 2012
EcoFin fails to reach a deal on Greece, pushes til Monday
UK PSNB rises more than forecast
Europe -0.25% Asia 0.87%
Oil $87.44/bbl
Gold $1726/oz.

Europe and Asia:
JPY Merchandise Trade Balance -0.62T vs. -0.42T
NZD Credit Card Spending -0.9% vs. 1.5%
GBP BoE Minutes 8-1 no QE
GBP Public Finances 6.5B vs. 4.1B
GBP Public Sector Net Borrowing

North America:
USD Initial Jobless Claims 8:30
USD Markit US PMI Prelim 8:58
USD U of Mich Confidence 9:55
USD Leading Indicators 10:00

A pretty volatile night in FX tonight as the EURUSD first tumbled on news that EcoFin failed to reach a deal on Greece and then recovered most of its losses on bargain hunting and hopes that EZ officials will reach a definitive agreement by next Monday. The Eurogroup President Claude Junker issued a very brief statement noting that , “The Eurogroup noted with satisfaction that all prior actions required ahead of this meeting have been met in a satisfactory manner. This reflects a wide ranging set of reforms, as well as the budget for 2013 and an ambitious medium term fiscal strategy for 2013-16. These efforts demonstrate the authorities’ strong commitment to the adjustment programme. “ However, he added that, “The Eurogroup interrupted its meeting to allow for further technical work on some elements of this package. The Eurogroup will reconvene on Monday, 26 November.”

The news of the delay initially sent EURUSD tumbling to a low of 1.2735 from 1.2822 high as traders dumped the unit in wholesale fashion. However, the pair has since stabilized and recovered much of its losses on anticipation that the Greek deal will be completed by Monday.

The technical decision revolves around the issue of whether to extend Greece deadline of returning to the bond markets. Under the original terms of the 2010 bailout deal Greece was supposed to reduce its debt to GDP ratio to 120% by 2020. However some EcoFin members believe that this deadline is unrealistic and were pushing to extend it to 2022.

As we noted earlier, the current Ecofin discussion resembles nothing more than a medieval argument over how many angels can dance on the tip of pin. Greece is clearly insolvent, the policy path of austerity politics has done nothing but exacerbate financial problems by continuously shrinking the country’s GDP and in the end Greece will need debt forgiveness if it is ever to resolve its problems. For now however, such discussion is politically impossible, but authorities are starting to look at ways of ameliorating the Greeks debt burden by a combination of lowering of rates and extension of maturities. Ultimately however, Greece will need restructuring rather than more bailouts in order to reduce its debt levels to manageable levels and maintain its membership in the euro.

In other news the BOE minutes revealed that MPC voted 8-1 to keep QE at current levels with only Beale arguing for an additional 25B increase. Meanwhile UK Public Sector Net Borrowing rose markedly more than forecast at 6.5B versus 4.1B eyed as the austerity policy of David Cameron continues to miss its targets. Cable lagged the euro in recovery as markets continue to be concerned about the state of the UK economy. EURGBP traded back to 8050 after slipping to 8000 on the disappointment from EcoFin.

In North America the eco focus turns to weekly jobless claims, still skewed by hurricane Sandy as well as U of M consumer sentiment data. USDJPY has continued to be on a tear clearing 82.00 in overnight trade and could target 82.50 as the day proceeds.