Sources suggest ECB and EU are drafting a statement on Greece debt relief

The Day So Far

The dollar continued to weaken at the European open this morning, with the euro strengthening above the 1.14 handle and the pound reaching new highs for the year against the dollar. This follows on from Yellen’s dovish performance at the post-FOMC press conference last night, where she stated that the Fed remained ‘data-dependent’ regarding rate hikes and refused to give any specific timeframe for when the Fed is likely to begin the rate hike cycle. T notes, which had been under real pressure throughout the day, swiftly reversed, trading all the way above the 126 handle, and the S&P rallied almost 20 points. European equities have underperformed, both into the US session close and this morning, as the euro strength and ongoing uncertainty on Greece weighed. Prior to the conference, the FOMC released their projections for inflation, GDP and the Fed’s Fund Rate, providing further succour for the markets, as they downgraded their GDP forecasts for this year, slightly upgraded their inflation estimates for this year and beyond, but most crucially the ‘dot-plot’ of the FOMC members projections of interest rates for this year and 2016 showed more dovish sentiment within the committee. The odds though remain firmly on there being a symbolic first hike in Q4, but Yellen’s testimony coupled with the FOMC projections, have given US treasury bears pause for thought.

A predictable caution reined in European equities, with the bund powering higher as investors sought safety ahead of ‘D-Day’ for Greece, with the Eurogroup meeting today, which has been bill as make-or-break , set to get underway at midday today. That said, markets were lifted by sources which suggested the ECB and EU are drafting a possible statement on debt relief for Greece. This is significant as it suggests that the creditors are willing to compromise and break with their previous stance that no haircuts be made. However, there was no mention of the IMF, the other major creditor who would need to agree to such a move. Of course, we are a long,long way from a definitive agreement, as any top-level agreement would need to be ratified by the Greek Parliament as well.

The Afternoon View

This time yesterday the outlook for equities looked bleak to say the least, ahead of two major risk events which had the power to transform this recent weakness in markets into full-blown bear markets. As it is, the FOMC’s dovishness last night has removed the first major risk to markets and today’s Eurogroup meeting has the potential to remove the other providing Greece and its creditors are able to come to some agreement. This is not the baseline scenario, as both sides have in recent days sought to downplay the likelihood of a deal at the meeting. Therefore, the relief rally in equities on a positive surprise would likely be spectacular, particularly in European equities which have ground steadily lower in recent weeks as ‘Grexit’ fears took hold. With markets on edge and headline-hungry, be prepared to react rapidly to speculation and doorstep comments. The European finance ministers are meeting first, at midday presumably to try to hammer out a deal to present to the Eurogroup meeting at 14:15 BST. Not much on the data front today, just US initial jobs claims and the Phili Fed Business Outlook at 15:00 BST.