The Overnight Report: And The Rumours Fly

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By Greg Peel

The far left Syriza party is attempting to form a government in Greece on a policy of abandoning the troika's bail-out measures yet remaining in the euro. Supposedly party leader Alexis Tsipras believes he can use the latter as a bargaining chip, trading off relief from harsh austerity requirements against the Europe-wide fallout of a disorderly Greek ousting from the eurozone.

It is nevertheless considered very unlikely Tsipras can form a government, which means Greece goes back to the polls next month. Presumably this is a constitutional requirement, but one wonders exactly what might change in the interim in terms of popular attitude. No party could form a coalition with a pledge to make good on the troika's bail-out measures. On that basis, the general expectation is that Greece will be leaving the eurozone. As to when, well there is no precedent.

Greece has a tranche of bail-out funds due now. Last week the troika was playing tough, indicating there will be no payment if Greece can't get its act together. Last night's first rumour was that this payment suspension had been confirmed, implying Greece must default, but news came through later in the session that Greece will get E4.2bn of its earmarked E5.2bn to make good on immediate obligations while the country remains without a government. The other E1bn is not needed until June, so will be held up.

So Greece will not default this month ahead of another election. What happens thereafter is anyone's guess, but an exit seems the only option. The troika is hardly going to back down for Greece just to save the eurozone, knowing that Ireland and Portugal will be next to question their own bail-out requirements. And that raises the obvious question: who's next to go? Talk on Wall Street is that it might be Spain.

Rumour number two last night was that the Spanish government was moving to nationalise Spain's banks. The obvious question here is: just where will the Spanish government get the money from to buy out the banks? On that basis the yields on Spanish bonds, which had been relatively stable throughout the European election disturbance, finally gave way. The Spanish ten-year jumped 28bps to 6.06% last night and in sympathy, the Italian yield jumped 21bps to 5.57%.

The actual news was that the Spanish central bank had been officially asked by Bankia SA if it would take an equity stake to prop up the embattled lender. Expectations are that the government may have to step in to guarantee all Spanish deposit banks, but in the meantime the government has told the banks they must raise another E35bn for provisions against bad property loans. That's on top of the E54bn the banks already need to raise for simple recapitalisation.

Any buyers? Anyone? Anyone?

It was the sixth down-session in a row for Wall Street last night and the third in a row featuring a drop from the open before a rally back to a less imposing close. However last night was different, this time featuring a late session capitulation. The Dow fell 184 points on the open and rallied back to be down a mere 11 points at 2pm. Two hours later it closed down 96.

One feels the big one is yet to come. Supporting the bull argument is the isolated US earnings story, but more importantly the expectation of QE3, along with the assumption of further ECB equivalent action. The buyers are trying hard, but they're losing the battle. The winners are the liquidators – those getting out into cash due to simple uncertainty. This is evident in another fall in the gold price last night, down US$16.30 to US$1589.50/oz. The VIX remains stoically at 20, although this included a 5% jump last night and the low numbers also reflect lack of positions to protect as much as any lack of protection demand.

The US dollar index rose 0.4% to 80.11. There may be some sort of budget impact in there, but it's pretty swamped at the moment, with the Aussie down 0.7% to US$1.0052. Base metals do not seem to be panicked at present – again posting relatively small falls last night – which probably indicates commodity funds have not been loaded to the gills this time given prices have been weaker for a while. Oil has also steadied, with West Texas falling US49c to US$96.52/bbl, but Brent rising US47c to US$114.20/bbl.

The SPI Overnight fell 30 points, or 0.7%.

The Australian jobs numbers are out today, providing grist for the rate cut speculation mill. We'll also see the Chinese monthly trade balance, along with trade balances from Japan, the UK and US.

National Bank ((NAB)) will report its interim result today.

Rudi will appear on Sky business today at noon. 

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