By Josie Cox
Uncertainty surrounding the financial future of Greece looks set
to dominate European markets in a short trading week, with the
country facing a deadline to submit its latest reform proposals
Monday.
Officials from Athens were in Brussels over the weekend to
present proposals to the European Commission, the European Central
Bank and the International Monetary Fund. Approval is crucial for
Greece to regain access to bailout funds and restore normal lending
from the ECB, but eurozone officials said that up until now, plans
had lacked the necessary detail.
Greek government bonds weakened somewhat, though trading volume
was thin.
The yield on the country's two-year bonds was around 0.43
percentage point higher in early trade at around 20.3% while the
yield on 10-year bonds inched up to around 10.87%. Many European
markets are shut Friday and next Monday.
A so-called inverted curve, where longer-dated bonds have a
lower yield than shorter dated, generally signals that investors
see a heightened risk of the country defaulting.
Many market participants said they expect Greece to strike a
last-minute deal. Still, "Greece remains at risk of insolvency,"
Peter Chatwell, a senior rates strategist at Mizuho International
said.
"Amidst the whirlwind of letters, high profile political
meetings and a daily batch of fresh comments from various policy
makers, it can be hard to gauge precisely where the disagreements
between Greece and its creditors reside," said Michala Marcussen,
global head of economics at Société Générale. "We nonetheless
maintain the view that a worst case outcome would have significant
market implications," she added.
Compounding jitters, Fitch Ratings on Friday slashed its credit
ratings on Greece deeper into junk territory, citing the country's
precarious finances as it negotiates a bailout extension.
The rating firm said it expects the government to survive the
latest "liquidity squeeze" without defaulting on its debt but
pointed to damage to investor, consumer, and depositor confidence
that "has almost certainly derailed Greece's incipient economic
recovery."
Athens main stock index was a little over 1% lower by
midmorning. Banks were hit particularly hard. Alpha Bank AE shares
slid to the bottom of the index, followed by National Bank of
Greece SA.
The U.S. dollar started the week on a firmer footing, rising
around 0.5% against both the euro and the British pound. The euro
is now 10% lower against the buck so far this year as a result of
the very different paths of monetary policy in the U.S. and the
euro area. The euro now trades at around $1.0850.
Despite the potential for Greece to derail the market, equities
more broadly rallied Monday. The Stoxx Europe 600, having ended
Friday's session 0.3% higher, climbed 0.9% in early trade, while
Germany's DAX, France's CAC and London's FTSE all added between
0.5% and 1%. Strategists said the persistent appetite for equities
was supported by a reiteration of the accommodative stance from
central banks in both Europe and China.
Last week, ECB President Mario Draghi underscored the ECB's
commitment to purchase large amounts of public and private debt for
at least 18 months and until it is convinced that inflation will
stabilize near annual rates of 2%.
In China, policy makers on Monday signaled the country has room
to ease monetary policy further, in a bid to boost sluggish growth
spurring stocks across the region. "We can clearly expect more
stimulus there," Rabobank rates strategists wrote in a note.
Later in the day, the People's Bank of China--in a further
accommodative move--announced that it had implemented new rules to
encourage banks to make mortgage loans.
Technology stocks were in focus on news late Friday that Intel
Corp. is in advanced talks to buy chip partner Altera Corp. Shares
in Intel surged more than 6% on the news on Friday also helping the
European subindex of technology stocks up 1.6% Monday.
Swiss airport retailer Dufry AG, however, was one of the biggest
risers on the pan-European index, on confirmation that it will pay
1.3 billion euros ($1.4 billion) to acquire more than half of
Italy's World Duty Free Group, a deal that will boost its position
in the global travel industry.
In commodity markets, Brent crude was 0.9% lower on the day at
$55.93 per barrel. Gold lost 1% to just over $1,187 per troy ounce.
In the U.S., the S&P 500 was indicated opening 0.6% higher on
the day. Futures, however, don't necessarily reflect moves after
the opening bell.
Write to Josie Cox at josie.cox@wsj.com
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