London View

Greece's Big Fat Order Book Surprises Markets

Fed meeting minutes warm up global stock markets; FTSE100, EuroStoxx50 and DAX all add healthy gains. S&P500 finished up 1.1% higher Wednesday while the tech-heavy Nasdaq index added 1.7%, staging a rebound following the rout in US tech shares amid growing concerns about inflated valuations.

 

Alcoa kicked off earnings season with better than expected numbers, gearing up investors for numbers out of JPMorgan and Wells Fargo on Friday. Asian markets followed the US lead but were generally broadly flat to higher following poor China exports data reading and decline in Japanese factory order which was weighed up against better jobs data out of Australia.

 

Here in Europe, the dominant driver of improved sentiment appears to be Greece’s opportunistic return to the bond markets with the country attracting a jaw-dropping EUR20billion order book for its 5-year bond –the paper was sold for EUR3billion versus the initial target of EUR2.5billion and the final yield is 4.95% - so a huge success. Certainly a surprise to us – the move by Greece at first to return to the bond markets appears to be opportunistic and somewhat symbolic as the country clearly wants to be able to raise its own funds to reduce its dependency on the Troika [its international creditors] who recently approved of more bailout funds because Greece behaved itself by implementing even tougher economic reforms.

 

Progress is slowly being made in the country’s economy, but I stress, very slowly with the country mostly being helped out by the wider-recovery in the euro zone which is filtering in. Greece still has a debt/GDP ratio somewhere around 170%, still much higher than the IMF’s target of 120% for the country and of course, the stubbornly high and frightening unemployment rate of 27.5% - the highest in the euro zone. Buying Greek bonds isn’t for everyone – perhaps the more riskier adventurous and contrarian investors but today’s news of the solid demand for the order book suggests those investors are out there. One could allude to that being the result of the rampant increase in risk-appetite due to improving conditions in the global economy since Greece left the bonds markets back in 2010.

 

However, to us, it seems that much of this demand for Greek bonds seem to be investors banking on Germany and the ECB ensuring that they will do whatever it takes to safe-guard the euro zone economy [measures discussed such as QE, negative deposit rates] – in some ways, you could say investors are buying into German/ECB-guaranteed Greek bonds. So on the whole, welcome news for the confidence of financial markets in the recovery-story for the euro zone periphery and again, quite telling about risk-sentiment in the global market space.

 

Looking ahead, we have a Bank of England policy meeting which is likely to yet again be another non-event as the Bank is set to keep policies unchanged however there’s certainly more pressure on MPC members to perhaps declare intentions about rate hikes next year which are now widely expected by the market but not acknowledge by the still dovish and cautious BOE who would rather wait for improvements in the UK economy before throwing out Janet Yellen style hints.