A supposed deadline has been imposed no Greece. By Friday a proper proposal needs to have been put together and presented in writing (an unsubtle dig at yesterday’s lazy schoolboy presentation by the new Greek finance minister Euclid Tsakalotos). With this done, the leaders can then consider the proposal at the summit on Saturday and Sunday in order to make a final decision on deal. It would appear that the Eurozone stand on the brink and the leaders are faced with a make or break moment. However strain is increasingly coming through the markets. Safe havens (Bunds and the yen) are the trade of choice as relatively riskier assets (equities and commodities) have been shunned. There may have been a curious rebound on some of the themarkets today, but this is still likely to be a bounce that is sold into. Below are a few charts that reflect my concerns.
There is nothing to suggest that in front of the meeting this weekend, anything positive will be seen. At best, Greece has shown a lack of willingness to seriously negotiate; at worst they have shown a level of disdain that suggests they actually wanted a Grexit all along. I am becoming increasingly worried now that if the politicians fail us this weekend, there could be an almighty shakeout in the markets.
Financial markets are showing the strain. The movement on the sovereign debt yield curves of Germany and Spain over the past month show this very well. Whilst German debt has been bought throughout the curve, the Spanish curve has shown the front end of the curve steepening, where shorter dated debt is being sold off, suggesting near term fears for investors. At the longer end of the curve, debt has actually bull flattened, however this is a reflection more of the average date of the purchases from the ECB’s QE programme (which has averaged between 7 to 11 years maturity).
The chart of the German 10 year Bund yield and the EUR/USD shows that if the bund yield continues to fall then the euro is likely to follow (This also shows with an uptick in the Bund yield today, why the euro has been a better performing currency today – but I do not expect this move to last).
The chart of the volatility of DAX options (shows with the DAX) also shows that downside pressure on equities is likely to continue. Volatility will go up as traders look to buy downside protection (i.e. put options) in order to hedge their long portfolios.
And just one more chart to really cheer you up, here is a chart of copper. Copper is often referred to as Dr. Copper as it is a decent gauge of the global economy (buying copper is a signal of stronger economic activity).