Germany Refuses to Compromise

Daily Analysis - 20/02/2015

The Greek Loan Extension Proposal Vehemently Opposed by the German Government


The Greek proposal for a loan extension was flatly denied by Germany as an insufficient solution to Greece’s existing bailout commitments.  As the Greeks seek to exit years of economic contraction and secular decline by relaxing certain terms, the Euro Area appears increasing stubborn in its negotiating position.

Tensions High

Tensions between Germany and Greece are high as Eurogroup negotiations remain stalled and no imminent compromise seems likely.  As the final day of negotiations with the Eurogroup begins, Greece is standing strong in its demands to ease the burdensome austerity measures as the nation seeks to escape years of economic contraction.  Germany has resolutely vetoed the latest Greek proposal for a loan extension after years of castigating the Greeks for their profligate borrowing habits and relaxed tax collection attitude.  As Greece burns through remaining available cash, the ECB expanded its Emergency Loan Assistance program to Greek banks by €3 billion as depositors pull funds ahead of Monday’s bank holiday.  To date, Greek bank customers have withdrawn collectively over €25 billion since the beginning of the year, exacerbating the funding shortage facing regional banks.  Tax revenue shortfalls are intensifying the situation further and unlikely to abate regardless of the decision arrived at between Greece and the Eurogroup.


Oil Inventories Climb

Crude oil inventories have soared higher in the latest reporting period with yesterday’s Energy Information Administration release showing stockpiles more than doubled expectations of a 3.2 million barrel build, expanding an additional 7.7 million barrels to new record highs.  This comes after the previous session saw API crude stocks smash forecasts as United States oil output climbed to a new record pace.  Daily output now stands at approximately 9.28 million barrels a day as marginal producers race to extract the black gold quickly enough to meet looming bond repayments.  Companies have shifted from higher cost projects to more efficient operations at locations with improved cost structures and better productivity to increase revenues.  While traders are equating recent gains in oil prices to be the result of the 34% drop in the drill rig count, the move is more suggestive of profit-taking from short positions.  Although oil briefly dipped below $50 per barrel, prices surged after the EIA announcement, bouncing back above $52.


Strong Dollar Saps Corporate Earnings

The U.S. corporate earnings outlook is facing a substantial setback as a stronger dollar makes exports more expensive for international buyers.  Caterpillar, a constituent of the Dow Jones Industrial Average that manufactures heavy equipment is facing similar prospects as the company records sales plunging at the fastest pace since the collapse of Lehman Brothers.  Other U.S. multinationals are feeling a similar pinch as the dollar impacts price competitiveness in international markets.  The FOMC underscored this issue in the latest Meeting Minutes along with other relevant risks to the outlook such as weakness in foreign markets, “stretched valuations” in equity benchmarks, and flagging consumer spending despite the drop in energy prices.  The manufacturing renaissance might also be approaching the end of the cycle as evidenced by the latest Philadelphia Federal Reserve Manufacturing Index which has slide 3-straight months with forward expectations cut nearly in half.


EURUSD Horizontal Range Technical Pattern

The EURUSD pair continues to trend sideways as conflicting reports about the state of Eurogroup negotiations and FOMC language create a sense of uncertainty amongst traders seeking to determine the directional outlook for EURUSD. The Federal Reserve is content to keep policy unchanged, opting to remain data dependent and maintain interest rates lower as risks to the outlook build. The main determinant of moves in the pair remains the stalled negotiations with Greece. No compromise seems imminent as both sides talk past each other with the distance between each side’s demands still very wide. The horizontal boundaries formed in EURUSD between resistance at 1.1445 and support at 1.1335 is an excellent opportunity for investors to trade the range between the two levels. Any breakout from the sideways trend will prove volatility and could see potential rewards of 65-80 pips. In the meantime, long positions at the bottom of the range and short positions at the top of the range remain the main strategy until the dust settles from the latest round of Greek negotiations.


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