The Greek Tragedy Resurfaces

BBH CurrencyView

• Greece’s decision to hold a referendum weighing on sentiment; global PMIs most softer thus far
• EUR/USD has retracted half of its Oct. move in two days; Greek referendum increases disorderly default risk
• US ISM manufacturing key report of North American session; Asian trade numbers focus of EMs

The overnight session was dominated by the aftermath of the news that the Greek Prime Minister intends to call a referendum on the latest debt agreement, with the dollar advancing against all the majors. The moves are likely exasperated in part by light liquidity with French and Italian markets closed for holiday. Nevertheless, the move by Greece (which throws an unwelcome spanner in the EZ debt deal) has led in part to the plunge is global equities, with the EuroStoxx 600 down over 3.2%. Above all, European bank shares are down over 6%, while the ECB is reportedly in the markets supporting Italian bonds, with the 10-year up 10bp. The RBA, as expected, cut rates by 25bps, with one more cut likely in the months ahead. Global PMIs were mostly soft, with prints in the UK, China, Switzerland and Norway all missing expectations, although Sweden’s PMI survey beat expectations.

The Greek government threw a monkey wrench into the European plans and global capital markets, by surprising markets overnights with a referendum on the second EU bailout agreement. We have highlighted consistently the political risks in Greece as a key driver for potential weakness in the EUR and from here it is likely that the euro comes under renewed, with the next level of support expected near 1.357. In short, this is a huge gamble by the government and is clearly a vote on whether Greece is prepared to carry out further austerity measures necessary to hold the currency union together in its current form. Indeed, the polls over the weekend showed around 60% of the public oppose the recent bailout agreement, but at the same time 70% want to stay in the euro zone. Alas, the government may have an uphill fight but nonetheless it only needs 51% to assure confidence amid hopes that pro-European sentiment can be tapped. Papandreou will likely submit a confidence vote this week and even if there is a yes vote, a referendum will take time to prepare and conduct, adding to uncertainties about the outlook for the sovereign debt crisis. A no vote is likely to see pressure added on the core countries to soften the terms of the bail-out agreement and might be the lesser of two evils if the alternative is Greece exiting the euro zone. As a result of this renewed uncertainty risk appetite is likely to sour, with the latest move by the BoJ likely to see further pressure on the USD.

On the data front today markets are likely to focus on the October ISM mfg. report. Indeed, the four point decline in the new orders component of the Chicago PMI was discouraging but at the same time many observers are likely to dismiss potential the impact of yesterday’s print for payback from the sizeable September gains. While the downside surprise of yesterday’s Chicago PMI is likely to pose potential downside headline risks, the overall improvement in nearly all the regional manufacturing surveys point to a modest rise in the October report. In fact, even though the headline empire state survey remained unchanged, the details were more encouraging with the forward-looking new orders and shipments components increasing sharply. The Philly fed survey showed a marked improvement across the board. In the UK October manufacturing PMI unexpectedly contracted to 47.4 from a downward revision of 50.8 in September. This was the lowest reading since Sept. 2009 and is likely to take some of the shine off the preliminary Q3 GDP data, which beat forecasts with a 0.5% reading for both q/q and y/y. New orders component dropped sharply into contractionary territory, to a 44.1 reading from 50.3 in the previous month, which was the weakest reading since the recession of March 2009. What’s more, the moderation in PMI increases the risks of a softer Q4 GDP print.

Trade numbers in Asia continue to call our attention. Korean trade figures surprised on the downside, rising at the slowest pace in 2 years at 9.3% YoY (exp. 10.9% YoY), while imports grew by only 16.4% YoY (exp. 22.3%). This comes on the heels of lower than expected trade numbers in Hong Kong, Singapore and China. On the positive note, Indonesian also released trade numbers overnight which came in stronger than expected. Also of note from Asia, South Korea inflation data came out this morning at 3.9% vs. 4.2% expectation. This is now within the BoK’s 2-4% target range and the core inflation data also fell. This is in line with our view that the bank may cut rates early next year. Inflation figures in Indonesia also surprised on the lower side, justifying BI’s decision to cut rates in early October. China’s PMI manufacturing disappointed, falling to 50.4 (exp. 51.8) in October, a 3-year low. We think that that China is not far from adopting a neutral or even looser policy stance towards liquidity and credit, despite many official comments still focusing on inflation.