Greek Prime Minister Papandreou had a Halloween surprise for markets on Monday as he announced a referendum on the EU bailout deal. The move was completely unexpected and could throw Greece (and Europe) into chaos. The euro dropped almost 100 pips as the news hit.
The Greek public will decide whether or not to accept the troika bailout terms. It seems almost a certainty that voters will reject the deeply unpopular austerity measures, a move that would force an early election.
The referendum is slated for January and the only hope seems to be a constitutional clause that says referendums can only be held on matters of great national importance. Some are saying the current situation doesn’t apply, as hard as that is to believe.
Another hope is that Papandreou will not last long enough for a referendum, he may be defeated in a confidence vote on Nov. 2-4.
The current thinking is that Papandreou wants out or that he wants to share the responsibility of the failure of the state with the public. Bondholders who accepted a haircut only two days ago may already be having second thoughts.
Turning to the forex market, the news today highlights the endless uncertainty that will plague Europe for years to come. The euro was absolutely crushed today, falling to 1.3848 from the close on Friday at 1.4146.
The reversal back below the 55, 100 and 200-day moving averages and the close below these levels at the end of the month suggests the rally was a false breakout. Knowing that the market was positioned heavily short (via CFTC COT) it makes perfect sense. Thursday’s rally was nothing more than a massive short squeeze.
I expect a half-hearted rebound in the next day or two and I will be looking to sell it.
Positive sentiment emerged in US trading on hopes that Greece will pass an austerity budget and news that Europe is working on Plan B if the vote fails. The euro was the top performer while AUD and NZD lagged on the day. Japanese retail sales are the highlight of Asia-Pacific trading.
EUR fell in early trading and overall sentiment was negative after Moody’s warned that deposits are rapidly being pulled from Greek banks but the trade reversed on talk that Europe may incentivize its banks to rollover Greek debt with a Brady bond-like structure. Greek PM Papandreou also predicted HE WILL HAVE ENOUGH VOTES to pass the austerity budget required for bailout funds. A vote is likely on Tuesday. The ECB’s Stark said the central bank is “very vigilant.” A JULY HIKE IS ALREADY PRICED IN but this helped traders feel a bit more confident about it.
US personal spending was flat compared to the +0.1% expected. Core PCE rose 1.2% y/y compared to the 1.1% expected. Although this is well below the Fed’s threshold, it is moving in higher and we believe it must fall below 1.0% before the Fed considers QE3.
Treasuries fell badly pushing yields higher by 5-9 bps across the curve. The selloff accelerated after a soft 2-year auction. The rising yields underpinned USD against JPY and CHF. Auctions continue on Tues (5yr) and Wed (7yr). The S&P 500 climbed 0.9% to 1280. Gold fell $5 and closed below $1500 for the first time since mid-May.
Comments from the Fed’s Kocherlakota (voter) did not relate to current policy, instead he called on the gov’t to lower the tax deduction on mortgage interest – something that has zero chance of happening in the next five years.
Japanese Retail Sales
Japanese retail sales are expected to be down 2.2% y/y in May compared with a 4.8% drop in April. PM Kan appears to be closer to resigning at the end of the current Diet session in mid-August. Nikkei News reports he has offered to quit once bills are passed authorizing a supplementary budget and deficit financing.