May 14, 2012 8:01 AM ET
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· Greece fails to form a stable governing coalition over the weekend. Markets await any commentary from party heads as they are set to meet at 1730BST.

· The PBOC have cut their RRR to 20% from 20.5% for large financial institutions in an effort to inject CNY 400bln into the national economy.

· German Chancellor Merkel's CDU party is defeated in regional parliamentary elections by the SPD.

· Flight to quality observed across the markets, with equities seen sharply lower and fixed income securities making gains throughout the session as risk-aversion is the theme of the day so far.

· RANsquawk European Morning Briefing Video: http://youtu.be/pFH-cUpptcg

Market Re-Cap

The failure to form a coalition government in Greece this weekend has prompted risk averse trade across the asset classes this morning with publications across Europe continuing to speculate about the potential exit of Greece from the Euro-area. As a result of this the Spanish 10yr yield touched 6.2% and the respective spreads over benchmark bunds in Spain and Italy have traded as wide as 30bps so far today. The knock on effect has been a sell-off in the financials which has seen the IBEX and FTSE MIB under perform in the equity markets with a relative safe-haven bid into the USD weighing on crude futures and precious metals. Spanish t-bill auctions and a variety of lines tapped out of Italy did stem the tide after selling around the top end of their indicative ranges but focus will remain solely on Greece given a lack of tier 1 data out of the US. Moving forward the next meeting of party heads in Greece is scheduled to commence at 1730BST, however, the head of the Syriza party has already indicated he will not be attending with the leader of the democratic left suggesting he is doubtful that a coalition can be formed.

Elsewhere, worth noting the PBOC cut the RRR at the weekend by 50bps as has been largely speculated in the last few weeks with the bank suggesting the move will release an estimated CNY 400bln of capital into the market.

Asian Headlines

The PBOC cut China's reserve requirement ratio (RRR) by 0.5% effective May 18th. The cut will drop the RRR for large institutions to 20% and to 16.5% for medium/small financial institutions. (Xinhua) The cut will release an estimated CNY 400bln (USD 63.5bln) of capital into the market.

Fitch have warned that is will likely downgrade China in the next 12-18 months as the central government takes over bad debt from banks and struggling local governments. The agency has kept their Chinese 2012 GDP forecast unchanged at 8.0%. Fitch have also commented on Japan, saying that the country's lack of fiscal progress is disappointing, and the agency remains comfortable with their negative ratings outlook. Elsewhere, JP Morgan have cut their 2012 growth forecast for China to 8.0% from 8.2%, and expects two or three further RRR cuts this year. (Sources)

US Headlines

President Obama said the US can take "plenty of steps" to boost its economy, but Congress needs to act on the economic proposals and should expand the mortgage refinancing programmes. (Sources)

EU and UK Headlines

The first round of talks between Greek political party leaders chaired by the President on the formation of a coalition government ended without resolution on Sunday, but the dialogue continued into the evening. (Sources) The leader of Greece's Communist KKE party has called for the annulment of Greece's loan deal, ruling out the party's participation in a coalition government.

EU's Juncker says Europe should reconsider its timetable for financial aid for Greece and renegotiate the contracts with the country. He sees no problem if the country gets one year or more to implement its consolidation program. (DPA-AFX) On a similar note, according to reports by Real News, the Troika is willing to make six important changes to the aid agreement, which could mean that Greece are given an extra year to cut its budget deficit. (FAZ/Sueddeutsche Zeitung)

Moody's have commented that Greece's inconclusive elections have increased the risk that the country could default and exit the Eurozone. For Germany, the agency has said the country's macro-prudential regulation will be credit-positive for the sovereign credit rating. (Sources)

Both Spain and Italy have managed to sell to the top of the indicative range in their respective auctions, however both countries saw an increase in borrowing costs, with the Italian yield hitting its highest level since January in their only on-the-run line. (Sources)

German chancellor Merkel's centre-right CDU suffered a bruising defeat on Sunday night in the election of a new parliament in North Rhine-Westphalia. (FT-More) According to the predictions from the ARD, results show the SPD got 39%, the CDU plunged to 26% and the Greens remain stable at 12%. (at the last NRW elections: SPD: 34.6%, CDU: 34.5%, Greens: 12.1%). (Die Welt)

The German finance minister said that Greece would receive a further aid program from the EFSF if it exited the Euro. He added that he remains confident that the fiscal pact will be approved in the German parliament before the summer break. (Spiegel/Welt am Sonntag)

Greece's potential Euro exit is to cost states EUR 276bln. Meanwhile, ECB's Honohan says that a Greek Eurozone exit can technically be managed. Elsewhere, ECB's Coene said that Greece's exit from the eurozone "would be possible," even if not in Europe's interest, and countries should have a democratic right to quit. (WirtschaftsWoche/Sources/FT-More) In related news, EU's Rehn says that Europe is more "resilient" to Greek Eurozone exit than 2 years ago. However, he added that he still believes that Greece can stay in the Eurozone.

Spain's central government is preparing to intervene in the finances of one of its autonomous regions, Asturias, as it grapples with the challenge of meeting this year's deficit reduction target. (FT-More)

Britain is to drop some of its objections to the EU's flagship reforms to the banking sector, removing the main political obstacle to a deal on one of the most divisive regulation issues in Brussels. (FT-More) UK Chancellor Osborne is ready to back an agreement tomorrow on the basis that the final details will not stop the UK from implementing Basel III and pursuing its flagship banking reforms.


European equities are seen sharply lower across the board straight from the open, with no sectors spared from losses. The lack of confidence in stocks follows reports that Greece are yet to form a stable governing coalition prompting renewed fears of a Greek exit from the Eurozone.

In other stocks news, among the financials sector taking the heaviest losses, UK banks are not spared following weekend reports that the UK Chancellor Osborne has softened his stance towards the EU banking rules. As such, the largest UK banks, RBS, Lloyds and Barclays are all seen up to 5% lower. HSBC has been somewhat protected from losses due the PBOC RRR cuts, however HSBC shares are still seen lower by over 2% at the midpoint of the European session.

Among the very few stocks trading in the green, Invensys are seen making gains, as weekend reports speculate that the company may be a takeover target. As such, Invensys shares now trade higher by over 4.5%.















Change (ticks)






**Note: For US equity news in detail, refer to the RANsquawk Daily US Equity Opening News report.


The lack of confidence in Europe has caused EUR/USD to tumble throughout the session breaking below the 1.2900 level and now trades in close proximity to a touted option barrier at the 1.2875 level. Unconfirmed market talk of macro funds buying in the pair may slow down the moves lower as the session goes forward. The EUR weakness is also evident in EUR/GBP, now testing 0.8000 to the downside and may break that level once the US comes to market and reacts to the weekend reports. Any moves to the upside in the cross may be capped by further unconfirmed market talk of offers at the 0.8015 level.

Elsewhere, USD strength is observed across the board as a flight to safety is observed. As such, AUD/USD moved below parity, and now trades comfortably below 1.0000, down around 40pips as the US comes to market.









Change (pips)





WTI and Brent crude futures continue their decline and both trade lower by around USD 2.00 on the session. Prices continue to be weighed upon by macroeconomic uncertainty regarding Greece and a stronger USD index.

Oil & Gas News:

· The IEA have said high oil prices are threatening the global economic recovery, despite having eased in recent weeks. The IEA head has said concerns remain over international political tension in Iran and limited spare production capacity.

· The Saudi oil minister has said Brent Crude would be better at around USD 100/BBL, adding that crude inventory should be a little higher. Al-Naimi has also said he aims to up the recovery in his country's oilfields to 70% from 50%.

· Australia have said they could have enough shale gas resources to double its gas resource base and expand its growing export industry, according to a government report.

· Hedge funds and big speculators made their biggest-ever cuts to bullish bets on crude oil, according to regulatory data released on Friday. Managers cut their net long futures and options positions to nearly their lowest since 2010, cutting by 81,674 lots, a drop of more than one-third.

· Bank of America have said strong gasoil backwardation is unsustainable due to supply.

Geopolitical News:

· Iran has warned that applying pressure to Tehran could jeopardize the progression of nuclear talks, according to state television.

· A senior IAEA official has said Iran must give access to people, information and sites as the nation needs to engage on substance in nuclear talks.

· China has denied it is increasing combat readiness in response to a tense territorial row with the Philippines in the South China Sea.

· The head of Iran's Kish Bilateral Insurance Institute has said a giant Chinese oil tanker company has requested his company to provide insurance coverage for their ships, despite the fact that the Iranian company can only insure ships belonging to the Iranian Oil Tankers Company.


WTI Nymex

OTC Spot Gold






Change (USD)




**Note: For commodities news in detail, refer to the RANsquawk Daily Energy Commentary report.


Economic Releases










Mortgage Delinquencies Q/Q (Q1)






MBA Mortgage Foreclosures Q/Q (Q1)






Actual FDI Y/Y (Apr)








German Chancellor Merkel & German Finance Minister Schaeuble speak in Berlin




SNB's Jordan speaks in Zurich




Euro-group meeting press conference






EUR 7.4bln 13-, 24-, & 50-Week T-Bill Auctions




ECB announcement of purchases under the SMP




Fed's Trea. Coup. Purch. May'18-Feb'20 (USD 4.25-5.00bln)




USD 30bln 3-Month and USD 27bln 6-Month Bill Auctions










Agilent Technologies

Prices taken at 1229BST

**'Market talk' - Signifies information that has not been formally tested through traditional journalistic channels and therefore is to be treated as unsubstantiated. Any interpretation of the talk is taken at the readers own risk and is a representation of the rumours within the market place and never generated by ourselves.

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