Key news

  • The Greek coalition government has failed to agree internally on the Troika’s demands ahead of today’s crucial EU meeting. This could mean a Greek default in March.

  • Chinese inflation rose to 4.5% y/y. This surprised the markets but in our view it mostly reflects the timing of Chinese New Year, so the increase should not worry investors.


Markets Overnight

The Greek tragedy continues. Yesterday it looked like the Greek coalition government had agreed on austerity measures, but negotiations continued overnight and comments from Greek officials this morning indicate that the government has not yet been able to fulfil the Troika’s demands. EU and IMF officials participated in the negotiations overnight and this morning Greek Finance Minister Venizelos said that a deal had not been reached yet. Hence, we are well into the 11th hour and there is still no deal prior to today’s crucial EU meeting. If the Greek government fails to agree internally it will be impossible for EU ministers to give the go-ahead for a new Greek bailout, which will most likely result in a disorderly Greek default in March.

The uncertain Greek situation has sent Asian stocks lower this morning after US stock markets ended up yesterday on hopes that a deal on Greek austerity measures was inching closer. However, the downward move in Asian stocks this morning has not been dramatic indicating that a lot of the risks relating to Greece are already reflected in market pricing. The Greek uncertainty has had little impact on the global FX markets and the major FX crosses have been trading sideways overnight.

In China consumer price inflation in January accelerated to 4.5% y/y (consensus: 4.0%, DB: 4.2%) from 4.1% y/y in December. The main reason for the acceleration in inflation is the seasonal distortion from an early Chinese New Year Holiday. Food prices usually increase in connection with this holiday and for that reason there will be an upward bias to inflation in January and a downward bias to inflation in February. Hence, the acceleration in inflation in February should prove temporary. CPI inflation in our view is poised to drop below 4% y/y in the coming months. Today’s number does not change our view that we will see cautious monetary tightening from People’s Bank of China in the coming months. We expect the reserve requirement to be cut by another 150bp in H1 2012, but we expect the leading interest rate to remain unchanged.