And so we have another deadline for Greece due today. This one is not a summit, parliamentary debate or injection of further bailout cash but instead will hopefully herald the end to the inexorable odyssey that has been the bond swap between the Greek government and the private sector.
As we have said in previous days the Greek government needs to obtain at least 66% participation for the deal to hold up but without 95% involvement then the usage of Collective Action Clauses, clauses that force non-compliant bondholders into agreement, is also probable. The activation of these clauses should be enough to trigger the payment of insurance that bondholders would have obtained via the CDS market previously. If the governing body of such matters were to decide that, even after writing down 70% of an investor’s holding and then forcing the loss upon them, a ‘credit event’ still hadn’t happened then all hell would break loose. Peripheral bond markets would fall dramatically as investors sold seemingly uninsurable bonds while CDS markets, for all assets not just bonds, would tumble. This would be a real turn up for the books and is very unlikely but does show how far down the yellow brick road we have come.
It is however, also Bank of England and European Central Bank day. Unfortunately no policy changes are expected from either body and so a day full of Greek rumours and “OMG, check out the new Ipad” is all but certain.
This Bank of England meeting 3 years ago was when the MPC decided to cut rates to 0.50% and it has remained there ever since. The increase in prospects for the UK economy has been shown through recent data publications but choppy waters remain ahead and the MPC will be taking nothing for granted. The renewed optimism has caused some to bring forward their expectations of when we will see monetary policy tighten, and rates increase in the UK. We think this is unlikely until midway through next year as the pressures from the EU remain evident for a long time yet. That being said people are starting to also price out the likelihood of further QE from the Bank of England at the May meeting. We think a lot of this will be contingent on movements in the oil markets and their effect on inflation and whether we see another shoe dropping in Europe. The minutes, published in a fortnight, will hopefully flesh this out for us.
The ECB are more likely to change their policy stance today by cutting rates but we put the likelihood at less than 25%. While the news flow from Europe remains poor, as typified by the recent PMIs and yesterday’s German factory orders, inflation remains above target levels and expectations of price rises as a result of oil price increases are also moving higher. Given the anti-inflation hysteria the ECB is known for it would take a miracle for interest rates to be cut.
The most closely watched release today will probably be the US initial jobless claims number due at 13.30. Yesterday’s ADP release was strong at 216k and has increased hopes that tomorrow’s payrolls announcement will be good. Jobless claims are expected to remain at recent lows and suggest that the jobs market in the US is strengthening on a week by week basis.
For all the analysis you need on the Bank of England and European Central Bank meetings tune in to today’s webinar at 2pm.
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