Part 2: Coming Week Market Movers. See Part 1 here.
Here are the top likely market moving events for this week. Together they suggest the highest volatility risk thus far in 2012.
1. Greek Bond Swap Deadline & Results To Bring Default?
Thursday March 8th could be a dramatic but ultimately insignificant day on which the EU once again defers an eventual Greek default. However it may also prove to be the day the historic first EU default occurs, and it’s that risk that makes this THE potential market mover of this week.
In case you missed it, here’s the key background.
Thursday March 8th is the deadline for private bondholders to ‘voluntarily’ exchanging their current Greek government bonds in exchange for new ones worth about 25% of the old bonds (as of last week), assuming Greece even repays this debt at all.
If Greece gets the minimum 75% participation rate needed from private bondholders that would then make it likely that the International Swaps and Derivatives Association (ISDA) rules the swap voluntary (despite the 75% loss at minimum!) and not a default.
No, we too don’t really understand how a 75% loss, or anything close to it, can be deemed voluntary, but such are the surreally desperate standards believed to be in place.
However, if less than 75% agree to this deal, then, because Greece can’t repay its current debt load, it will essentially force all bondholders to accept the deal anyway. It can do that legally because 2 weeks ago Greece retroactively added a Collective Action Clause (CAC) allowing it to impose these conditions on bondholders. That in turn would strip away any final pretense that the deal is anything other than an outright default.
Opinions on the near term ramifications vary from a mere temporary fear driven pullback (until the latest temporary band aid is applied) to outright panic and market collapse as all GIIPS and most major EU banks face impending insolvency as their debt is deemed too risky and thus too expensive to issue).
The fact that global risk appetite remains in an uptrend, with most global stock indexes at or near at multi-year highs, suggests that markets believe all that will once again be deferred and ultimately avoided, because, well, it just must be. The consequences are too terrible to face.
Given those consequences, the ISDA might somehow still refuse to call the default a default. The consequences are unlikely to be much different. The default insurance known as Credit Default Swaps would lose all credibility. Without any way to hedge default risk, GIIPS bonds would still be viewed as far riskier than previously thought.
Just like in July 2011, when haircuts were first officially introduced and GIIPS bonds became much riskier, contagion will start again as GIIPS bond yields would adjust for that risk, and spike beyond what these nations can afford to pay. Under this scenario too, they are shut out of bond markets, along with the EU banking system that holds most of these bonds, and face imminent insolvency.
Thus far the ISDA has refused to rule Greece in default because until March 8th the outcome is uncertain, It has indicated that only the actual use of the CAC clause, not its mere the insertion and threat of use, constitutes default.
So by the end of Thursday we’ll have a good idea about whether the bond swap is voluntary or not. The final ruling from the ISDA is due Monday March 12.
If Thursday ends badly, things could go South fast. The next day, EU leaders are scheduled to make their final decision on the second Greek bailout (originally approved back in July 2011). They could reject the bailout if they believe their banks are ready to absorb the losses from a Greek default and those that may follow. However, recent history suggests that if the banks aren’t ready, and that the EU will agree to pay €130 bln (or at least some of it as it will not be released all at once) to buy some more time.
If the EU rejects the bailout, it’s safe to assume that the EU leadership is ready to keep its banking system alive.
So Thursday’s the next of an increasingly frequent series of hurdles the EU must jump to stave off a crisis.
Mark it down Thursday’s the day.
Even without the Greek drama Thursday and Friday, this week would qualify as the biggest of the month for event risk. Here’s what else is coming:
2. Five Central Bank Rate Statements and Policy Announcements
The Reserve Bank of Australia (RBA) comes first on March 6, followed by the Reserve Bank of New Zealand (RBNZ) the next day. Then Thursday we get the BoE, the ECB and BoC rate announcements and comments. If the Greek debt swap fails to attract 75% or better participation, these are likely to be drowned out by the sound of investors rushing for the exits, dumping risk assets, and buying safe haven assets like the USD.
If the Greek debt swap attracts better than 75% participation and appears to avoid default risk, these announcements could fuel volatility if they provide any element of surprise.
3. US Monthly Jobs Reports
US monthly jobs reports (and those that hint at their results like ISM Services PMI, ADP NFP, etc) on Friday could be grabbing attention, given the importance of Friday’s figures in maintaining optimism about the US recovery. A very good result should benefit the USD because it would further lower QE 3 threats to its value, and also raise rate hike expectations. A very poor result might also benefit the USD as a safe haven play.
New Zealand, Australia, the EU, France, and Canada also issue their monthly jobs reports, though these are rarely market moving.
Disclosure/disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.
