The German IFO is forecast to show a further improvement too

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At last a deal, but stumbling blocks remain

Friday afternoon, markets reacted on signs that an agreement between the Eurogroup and Greece was in the making. So, core bonds lost some ground and European equities recouped losses. US equities eked out moderate gains. EUR/USD was little changed. Peripheral yield spreads were little changed. Admittedly, these moves are small, but there was also little reaction over the past weeks when Grexit chances increased. So, we are curious what markets will do today and in the next days if the agreement becomes final. Of course, Yellen’s testimony might overshadow the epilogue of the Greek issue.

Today, the eco calendar contains the German IFO business climate indicator and US new home sales. After Friday’s PMI’s, the German IFO is forecast to show a further improvement too. The consensus is looking for an increase from 106.7 to 107.7. Last week’s PMI’s showed that strength was mainly based in the services sector. Nevertheless, we expect risks for a slightly stronger outcome.

The Eurogroup and Greece reached a conditional agreement about the extension of the bailout package with four months. The package normally expires on February 28 and without an extension chances on a Greek default were high. Greece has to submit a list of reform measures it will undertake (that will replace certain measures agreed by the former government) by today. “The authorities commit to implementing long overdue reforms to tackle corruption and tax evasion, and improving the efficiency of the public sector”. The Troika (“the Institutions”) will evaluate the list and determine whether a 4-month extension could be allowed. If the Troika approves the measures as a sufficient basis to complete the current bailout, it will be agreed by the Eurogroup on Tuesday, allowing (some) national parliaments to agree before the end of the week. If not agreed, the deal may unravel, but in the press conference it was mentioned that an immediate Eurogroup meeting would be organised. An extra evaluation moment is planned for the end of April. “Only approval of the conclusion of the review of the extended arrangement by the institutions in turn will allow for any disbursement of the outstanding tranche of the current EFSF programme and the transfer of the 2014 SMP profits. Both are again subject to approval by the Eurogroup.”

“The Greek authorities reiterate their unequivocal commitment to honour their financial obligations to all their creditors fully and timely.” Greece had to swallow most of the conditions of the existing bailout, but got some room to replace some measures by others. Greece will now put the focus on crackdown of taxation and a more equitable taxation and a more efficient government. It hopes to revert some earlier decisions on (lower) pensions, higher VAT and would rehire some government workers. Greece promised to do nothing without consent of the institutions and nothing to deteriorate the economic outlook, the fiscal situation and the stability of the financial sector. Greece got some concessions. It got some wiggle room on the primary structural surplus of the government for 2015 (3%) which would be reviewed taken into account the existing (worse) economic situation. It might also get a lowering of the 4.5% surplus pencilled in for the following years in the previous bailout conditions, but this is still subject of discussion. This is a Syriza victory as it gives them some room to change the current domestic policy. However, there was already critics from within Syriza that in fact little had changed on the content of the agreement. So, also from this side there are still some risks, even if we think markets will consider the Greek problem to be off the radar for a few months.

However, it looks like the negotiators were aware that another, third, bailout package will be needed in which debt relief and a re-orientation of the conditions, more in line with the Syriza policy orientation are possible. If the agreement is effectively extended, the ECB should reintroduce the waiver on lowe-rated government paper and allow Greek banks to use Greek government paper as collateral in the ECB liquidity operations.

Overnight, Asian stocks trade positive in line with Europe/US on Friday as the Eurogroup agreement on Greece modestly boosted risk sentiment. The follow-up impact is negligible, perhaps waiting on the “go ahead” by the Institutions on the list of reforms (see above) and pending approval by national parliaments. The US Note future trades neutral just above Friday’s lows. The Bund is expected to open near Friday’s after-market low.

Today’s eco calendar is thin in the US (existing home sales), but interesting in Europe. German Ifo is expected to show a further improvement with risks on the upside of expectations. The Institutions will review a first list of Greek reforms which, if approved, would be a valid starting point for a successful conclusion of the final review of the current programme and an extension of the current bailout by four months. A stronger German Ifo and a thumbs up by the Institutions would be a short term negative for the Bund with a test of the downside of the narrow 157.97-159.54 range. A break is possible, but would still be of minor technical importance with the up trend still intact. Longer term, we hold our view that ECB QE buying limits upward potential in EMU bond yields. On peripheral bond markets, Greece can outperform while the impact on other peripherals should be minor.

For the US, we hold our view that the gap between rate markets and Fed indications remains large. We believe it will eventually shrink further (hawkish rescaling of rate hike bets), as we still target a June rate hike. Technically, the US Note future broke below the 128-23+ support (neckline double top). We still eye a further drop. Next support is 126-09+ (final target double top). Ahead of tomorrow’s Humphrey-Hawkins testimony by Yellen and given the somewhat dovish Minutes, the sell-off could slow.