Greek coalition hardens up for EU negotiations

• Syriza and Independent Greeks form coalition to fight austerity

• Russian rouble continues to fall apart on ratings downgrade

• Euro expected to recover as we wait on negotiations

• UK Q4 GDP due at 09.30, expected at 0.6%

Good morning,

The focus on Greece continues this morning although the FX market impact is not the prism through which to view this particular concern for now. The coalition between the Syriza and Independent Greek parties is a mix that has but one common thread; an end to the austerity program currently running in Greece. This is a strong move by Tsipras against those within the wider EU that think him an empty shirt or someone who will roll over easily. Negotiators may need to put on some helmets and pads before they get together. Tsipras’s visit to a memorial for 200 political activists shot dead by the Nazis in 1944 is a pretty overt ‘get stuffed’ to the forces that Syriza and their supporters see at play in the European Union.

The negotiations will start soon and we believe will largely contribute to a weaker euro eventually as reports of disagreement emerge. The EU’s balancing act of carrot and stick to the Syriza party is very interesting. Offering too much to the new Greek government will put a fire under every other single anti-EU/austerity party going. Podemos in Spain, the 5 Star Movement in Italy, UKIP in the UK, the AFD in Germany and the Front National in France to name but a few would all benefit from an EU kowtowing to a strong Greek leader.

The ongoing euro weakness will continue in my opinion but certainly some of the risk and feeding frenzy that we saw last week has drifted out of these markets. The single currency has rebounded handily from the lows and we would be not be surprised by another leg higher for the euro causing those short on the currency to exit, bank their profits and pick higher levels to express their desire for a lower EUR.

That is not to say that there is not a currency out there that isn’t falling apart; this is 2015 after all, the year when markets can’t fail to surprise you. The Russian rouble is on its back this morning once again following S&P cutting its credit rating into junk territory as oil prices have fallen to fresh multi-year lows and the impact of EU/US sanctions continue to hammer growth prospects. There are also severe limits to what the monetary authorities within Russia can do to aid the economy. Tightening policy and raising interest rates within the economy has not done anything for inflation nor has it supported the rouble. Intervention by the central bank has been swallowed by the market as if an after dinner mint.

Likewise the Russian government’s fiscal position is deteriorating as increased spending is nowhere near to being matched from revenues. A $100 increase in the value of a barrel of oil would help but looks as likely as Vladimir Putin announcing his love of kittens and long walks on the beach. S&P said its outlook on the country was ‘negative’. Sums it up well one would think.

The highlight of today’s data calendar is the UK’s first iteration of Q4 GDP. Moving through Q4 we were alive to the feeling that the UK economy was slowing from its zeniths in Q2 and Q3. PMI surveys of the manufacturing, services and the construction sectors remain in strongly positive territory but lower than the multi-year highs that had been seen through the summer. The headwinds to growth are fairly obvious we would say. The slowing of the Eurozone and China in recent months has damaged flows with two of our largest trade partners while business investment remains on the sidelines as the uncertainty over the General Election and the UK’s relationship with the EU continues. Consumers are seeing disposable income increase but seem more likely to squirrel away anything left over at the end of the month as opposed to spending it. Fears over the unemployment picture and the slow improvement in real wages are to be blamed for this.

Markets are looking for a quarterly growth number of 0.6% which we think is about right. Upside surprises will fuel the belief that inflation could return soon as oil price falls eventually fall out of the basket whilst a miss will only embolden those on the Bank of England looking for lower interest rates for longer.

The announcement is due today at 09.30.

Have a great day.