The Greece bailout negotiations ground on again this week, although markets are displaying a certain amount of numbness to developments in Athens and Brussels. The central issue has been the passage of another round of austerity measures demanded by the IMF and EU as a condition of the next tranche of bailout payments. As Greece’s fiscal position has deteriorated and the Greek populace becomes more enraged, extracting another round of cuts has been incredibly contentious.
Negotiations among the three main parties in Greece’s coalition government continued all week long, and on Friday the right-wing LAOS party withdrew its ministers from the government to protest the package. LAOS party leader Karatzaferis commented that “clearly Greece can’t and shouldn’t do without the European Union but it could do without the German boot.” The parliament will vote on the measures on Sunday, and next week the Eurogroup is expected to make a “final decision” on whether or not to release funds (keep in mind that deadlines such as these have often turned out to have very short shelf lives).
In other news, Chinese data out this week were concerning. The January CPI report saw the first rise in official inflation levels in six months, while China’s imports and exports declined for the first time in two years in January.
The ECB kept rates on hold at its policy meeting this week, and ECB President Draghi took pains to emphasize the success of the LTRO in helping avoid a credit crunch and that there is no stigma for banks taking LTRO funds ahead of the second operation on February 29.
In the UK, the BoE increased its asset purchase target by £50B to protect the nascent UK economic recovery from the threat posed by the European debt crisis. In the US, state attorneys general finally agreed to a blanket €25B mortgage fraud settlement with big banks. For the week the DJIA lost 0.5%, the S&P 500 dropped 0.2%, and the NASDAQ slipped 0.1% (ending a five week streak of gains on the tech index), while the VIX volatility index rose 22%, its biggest weekly increase since November.
Coca-Cola and PepsiCo both met expectations in Q4 reports, on somewhat subdued volume growth. The only real standout area for Coke’s business was China, where volumes grew 10% y/y. Shares of Pepsi suffered after the CEO also took the opportunity to reiterate that the company would not be spinning off its snacks business. Fast food giant Yum Brands kept its shares at lofty levels with another successful quarter, slightly exceeding consensus views. Yum executives noted that over half of the company’s operating profit is now generated in China as emerging markets continue to drive growth.
Entertainment giant Disney topped profit expectations in its Q1 report, as margins at its profitable parks business continue to offset big revenue declines in the studio arm. Time Warner topped expectations and generated solid revenue growth. Sprint’s quarterly losses steepened after a few quarters of better performance, although executives insisted that FY12 would be the year Sprint returns to consistent profitability.
Cisco continued its comeback with solid second quarter results. The firm beat expectations and its quarterly guidance was satisfactory. Executives even bragged that the guidance was conservative, and many competitors’ revenue growth outlook has been much flatter than Cisco’s. Tech darling Groupon offered its first quarterly report as a publically traded company, and the picture is not pretty. Groupon missed Q4 earnings targets citing the cost of foreign taxes, although its Q1 revenue guidance was stronger than expected.
Global energy giants BP, Petrobras, and Total reported quarterly results this week. BP and Total had incremental profit gains, and BP also authorized a big dividend hike. Production was down to flat, with little improvement expected in FY12. Petrobras’s profit declined by more than half in the quarter and production in the quarter was a bit lower y/y.
FX markets seemed to be coming down with a case of Greek crisis fatigue, as EUR/USD maintained a relatively narrow range despite the back-and-forth in Athens. The greenback softened midweek as optimism about a deal picked up, however the declines on Friday seemed much less steep than they could have been, given the delicate state of play within Greece’s governing coalition. Overall euro downside has been limited despite the Greece situation. The 1.3220 January high provided some stiff resistance before giving way mid-week. However the events of Friday pulled the pair back below 1.3220, to test as low as 1.3156.
The yen maintained a soft tone throughout most of the week, aided by some continued verbal intervention by Japanese officials. Japan Fin Min Azumi reiterated that Japan was prepared to intervene in its currency when required and that the October round of solo FX intervention was successful in curbing JPY currency strength. The EUR/JPY pair hit 7-week highs above 103.00 while USD/JPY held above the 77 handle. The question remained whether corporate hedging would take advantage of the recent JPY weakness ahead of the fiscal year-end in March.
In Switzerland, the SNB’s Jordan reiterated that the bank would defend the EUR/CHF floor at 1.20 with unlimited quantities of foreign currency purchases. He warned once again that the current CHF currency rate posed challenges for the economy but also said he expects the franc to weaken over time. EUR/CHF tested the 1.21 level for its highest level in two weeks.
The Reserve Bank of Australia surprised markets by holding its cash target rate at 4.25%, rather than implementing the third straight 25bps cut that had been expected. Policymakers heeded hotter than expected core inflation in the most recent quarterly data as well as improved trade balance data for December that showed a 3-month high. The RBA also noted borrowing rates having declined to historic average levels and observed “slowing but robust” growth in China. AUD/USD hit 6-month highs above the $1.08 figure but pared its gains on Friday after the quarterly RBA policy statement reduced targets for H1 GDP and inflation in Australia.
In China, consumer inflation data was also surprisingly more bullish. January CPI came in at a 3-month high 4.5% y/y against consensus 4.0%, rising for the first time in 6 months. The trade surplus also came in well above estimates of $10.4B at $27.3B – likewise a 6 month high. Analysts have attributed counter-trend data to the altered seasonality of the Lunar New Year (Jan in 2012 vs Feb in 2011), however any short term expectations for another reserve requirement ratio (RRR) cut by the PBoC are now likely to be pushed back.