Sentiment Dampened by Lackluster Progress in Greece

7 February 2012 7 February 2012

SondraHunter

Market sentiment was negatively affected by the lack of progress in Greece's PSI and deal with the troika regarding the new bailout package. Wall Street retreated with the DJIA and S&P 500 losing -0.13% and -0.04% respectively. 2 major crude oil benchmarks continued to move in opposite directions. WTI crude oil slipped amid talks of IEA's downgrade of its 2012 demand forecast while Brent crude surged on exceptionally cold weather in Europe and global supply constraints after sanctions on Iran. Gold price eased a tad as the US dollar strengthened. Comments from several Fed presidents after the January employment report indicated Fed members are having wider split on monetary policies.

The EU/IMF/ECB required Greece to speed up its economic reform and deficit cuts so as to tap the new bailout fund worth of 170B euro. However, the progress has been slow so far. The latest update was that Greece agreed to agree to cut 15 000 government jobs in 2012 but this commitment was insufficient in the troika's mind. Similarly, the PSI deal has still not been finalized after discussions for months.

Comments from St. Louis Fed President James Bullard that the Fed should increase interest rates next year revealed the split in views among FOMC members. Bullard, not a voting member this year, said that he disagreed with the Fed's announcement to leave interest rates at exceptionally low levels at least until late-2014. He said that 'it's important to start to remove accommodation - even when you go up to 1 -1.5%, that's still very easy monetary policy ... It's a matter of getting to a normal level of interest rates at the right time. I don't think you want to wait until everything is exactly the way you'd expect it to be." The January employment released last Friday was a pleasant surprise with the jobless rate unexpectedly declined. We would not be surprised to see more divergent opinions among Fed members regarding rate hikes and QE3 at the upcoming meeting.

Fed Chairman Ben Bernanke will testify in the Senate. While his comments will likely be similar to those made to the House, it would interesting to see if he would make any changes after Friday's payrolls report. The RBA unexpectedly left the cash rate unchanged at 4.255. This was in contrast with consensus of a -25 bps cut. The central bank stated that interest rates for borrowers have declined to be close to their medium-term average after the 2 consecutive rate cut since November.