US eco data on the forefront as is ECB decision on ELA

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11th hour initiative Tsipras flatly rejected

Yesterday, global core bonds had a volatile session that ended with mixed, modest results for the day. Developments on Greece and US eco data defined intraday trading. The German yield curve shifted slightly lower with the belly outperforming and yield changes ranging from -1 bps (2-year) to -3.5 bps (5-year). In the US, the curve shifted slightly higher with again the belly underperforming and yield changes ranging from +0.5 bps (2-year) and +2.9 bps (10 year). Peripheral yields spreads were initially modestly wider, but finally ended the day marginally lower (1-to 5 bps). The price action in the past two days suggests that Greece is considered as a specific, non-systemic issue that won’t lead to generalized contagion. Of course, it may still cause a lot of volatility, but the ECB should be happy that it doesn’t really unsettle the peripherals in longer term perspective. Therefore, peripheral bonds are a buying opportunity, especially in case of further spread widening even if temporary risk-off events are still to be expected.

Regarding Greece, Tsipras did an 11th hour request for a two year extension of the bailout with new funding for Greece and debt relief, in return for more information??? and an eventual reframing of the referendum terms. According to sources, it didn’t contain any reference to reforms or austerity. This looked from the beginning a no-starter and again a tactical manoeuvre. However, chancellor Merkel made very clear that there was absolutely nothing to talk about before the referendum. Nevertheless, the Eurogroup will hold a teleconference today (11:30 Brussels time), probably in preparations of possible initiatives after the referendum. Greece still asked the IMF to suspend the debt repayment and pay later, but we suspect that to be flatly rejected once the board will discuss the request.

US eco data on the forefront as is ECB decision on ELA.

According to the first estimate, the euro zone manufacturing PMI rose from 52.2 to 52.5 in June, mainly due to strong data from Germany and France. The final reading is forecast to confirm this outcome, we believe that the risks are for a downward revision. In the meantime, the situation in Greece worsened again which might weigh on sentiment. In the US, the manufacturing ISM finally picked up in May, improving from 51.5 to 52.8. For June, the consensus is looking for a limited further increase to 53.1, but we believe that the risks are for an upward surprise following overall stronger regional indicators. In May, the ADP employment report showed a pick-up hiring to 201 000 from 165 000, but still well below the official payrolls report. For June, the consensus is looking for a further, albeit limited pick-up in private sector hiring to 218 000. We continue to see upside risks following better eco data recently and after the strong payrolls report last month.

Today, The ECB will again consider its ELA decision on Greece. As Greece is now in “technical” default on its IMF debt, the ECB could decide to stop its ELA.
More likely the ECB will keep its ELA ceiling frozen till after Sunday’s referendum.

Overnight, Asian equity markets trade in slightly positive territory. The Japanese Tankan report for large companies was stronger while the Chinese PMI’s were mixed. The effects on equities were minor though. It seems a wait-and-see period has started in the run-up to the Greek referendum, even as US eco data, especially Thursday’s payrolls may disturb this wait-and see attitude.
US Treasuries are close to yesterday’s late session levels, which suggests a Bund opening around 152. Main FX crosses are unchanged while oil is a bit lower and gold nearly unchanged.

Regarding trading today, for the eco data, we see some downside risk for the final EMU PMI’s, but don’t expect a lasting effect. Regarding the US eco data, we see mostly upward risks to ISM and ADP, which might have a negative impact on US Treasuries, but also here investors may be cautious as they probably won’t be taken awry be a negative surprise from Greece (NO vote at referendum or political turmoil after a Yes vote and impossibility to form a stable government). Given these factors, we think that core bonds may stabilize to drop somewhat lower (especially US ones) today.

Until now, the market reaction on Greece should be considered as ok, not too heavy with no real sign of substantial contagion.. Cautiousness remains the key advice though (referendum). Further spread widening in the peripherals opens buying opportunities, while a decline of 10-year Bund yields to e.g. 0.50% would offer selling opportunities.

In general, we favour higher yields, but first the Greek issue should be resolved one way or another.