Risk-off afternoon after Greece setback

The Morning’s Action

Risk-off returned to the market after several days of gains based on the expectation of a deal between Greece and its creditors. These expectations have just been crushed, with comments this morning attributed to Tsipras claiming that the creditors have rejected the Greek proposal submitted earlier this week. The exact reasons are unclear, but the IMF in particular are known to be pushing for a better deal, with the Greeks having used up a great deal of goodwill in recent months. Unfortunately for Tsipras, patience is wearing thin with the creditors and within his own party, as Syriza hardliners are incensed at their leader’s deviation from the pre-campaign election promises to fight hard to secure a better future for Greece. Now that hopes of a Greek deal this week have been dashed, and time running out to present an agreement to be ratified at tomorrow’s EU leaders’ Summit, it looks increasingly likely that Greece will default on its payments due to the IMF on Monday. Equities are under pressure, with the Dax down over 1% on the day and briefly falling below the 11,400 handle before recovering a touch. In classic ‘risk-off’ fixed income has been solidly bid on the back of this setback, following several days of sell-offs the Bund has now broken back above the 151 handle.

Elsewhere, WTI crude has traded higher today, reaching the top of the two-month range we’ve been in, from $57 to $62, and looks poised for a final break higher if the DoE inventories to be released this afternoon follow the API release last night, which showed another strong reduction in supply of 3.2 million barrels.

The Afternoon View

Given the considerable setback in the Greece negotiations , we are looking for further risk-off this afternoon. The Greek creditors have sent a counter-proposal to the Tsipras & co, and it remains to be seen how this will be received , particularly given that the Greek President probably feels like he really pushed the boat out with his initial proposal, crossing in his previous ‘red lines’ including pension reform and VAT increases. Within Syriza, the simmering discontent at his management of the crisis threatens to descent into mutiny, with the much-maligned Finance Minister Varoufakis apparently looking to breakaway from the government with other frustrated extreme left hardliners in the party. We are long t notes, despite the hawkish comments from Fed’s Powell, who claimed the Fed could hike rate twice this year, there should be a ‘flight to quality’ if equity markets continue to sell off sharply this afternoon.

The euro, in spite of everything, is clearly not reacting to the disintegrating situation in Greece, therefore we are looking for a long, particularly if crude manages to make new multi-month highs following the DoE release today at 15:30. Expectations are high ahead of the release, following several weeks of reductions in supply, although prior to previous releases crude has traded higher ahead of the data following the positive API release the day before, only to sell off on the news. So, although we are looking for a bullish reaction, traders should beware of the ‘sell the rumour, buy the news’ meme which has characterised recent releases.