The Greek FinMin stated that the government would have to stop payments, salaries and pensions should Greece not receive its latest tranche from the IMF. The IMF said its tranche is dependent on that of the EU. And on that consequent brink, Greece stated it would go ahead with privatisation and further budget cuts it had earlier delayed. All familiar territory in IMF negotiations.
Peripheral pressure on a GDP weighted pressure had already reached 291 bp CDS points vs core Europe, with the peak reached at 319bp end of November 2010. However, contagion remained relatively limited outside of Europe. The spike in the DAX and Eurostoxx VIX did trigger contagion via a spike in the S&P500 VIX, triggering automated stop losses in the Americas, but that was broad based rather than centred on a given asset class indicating that positioning has significantly weakened. Since the US session we are in a stabilisation mode, with futures pointing to a recovery in Europe.
Interestingly, a vector of contagion, namely that European banks must fund part of their USD assets in EUR has actually improved or stabilised during the crisis. EURUSD front end forwards gapped lower in April as funding was more difficult to come by in USD for some European banks and has since then improved indicating that banks anticipated well that risk. Typically, this mechanism increases the swings in EURUSD. Hence, the potential downside in EURUSD has diminished.
If the recent pattern persists, we will see the near-end of the world on Monday replaced by a gradual return of risk appetite until Friday, when pre-weekend jitters will return. AUDJPY and EURJPY should rally as the safe haven bid demand for UST falls, moving USDJPY higher. EURUSD should retrace higher helped by a strong German GDP and reserved demand as Asia/USD rises. German IFO expectations will be downbeat in line with the markets. GBPUSD may struggle ahead of some key data. EURCHF should continue retracing higher as the CHF safe haven bid diminishes. Front end vols will come down while spot traders wait for the next retracement levels to attempt new shorts on the spot side. SEKCHF is probably the trade today with long EM/USD (e.g. USDZAR short).
GALY Sebastien
Societe Generale
Research & Analytics