Singapore Markets Morning Briefing - what you need to know for Mon Feb 20, 2012

US equities are said to be in buoyant mood, and everyone awaits the results of the EU ministers’ meeting today.

Justin Harper, IG Markets Singapore head of research, said:

Singapore could be in for a bright start to the week with a Greek bailout agreement looking like it may happen later today, a relaxation of China’s monetary policy and US equities in buoyant mood.

Mondays have recently been filled with dread over what developments have taken place in Europe over the weekend, or haven’t in the case of Greece. But there seems to be an air of optimism ahead of the EU ministers’ meeting today to agree the release of much-needed funds. Greece has been helping to oil the wheels by approving further budget cuts of 325m euros including cutbacks to pensions and health care.

Asian markets could also get a lift from the surprise announcement from the PBOC that it has cut the Reserve Requirement Ratio (RRR) for its banks by 0.5 of a percentage point, which while sounding minor, could release 400 billion Yuan into the economy in fresh lending.

With the ECB offering more cheap loans to eurozone banks a flood of cheap money is expected to slosh into the global economy from Europe and China rising the tide of risk. The markets are already starting to see a heightened risk-on sentiment returning to India, South Korea and Taiwan.

The STI broke through the 3,000 last week and managed to end the week staying just above this important level. This week could see the STI use this as a decent springboard to put some more points on the board with the positive outlook being felt across the region as the week starts.

Of course we are not without clouds on an albeit sunnier horizon. Companies are picking through the details of Friday’s Budget and calculating how it will affect them. Already there are grumbles of higher labour costs and the stoking of inflation, due to the impending foreign worker curbs.

There will be no direction from US markets tonight as the country is celebrating President’s Day today. But based on its Friday session, the US is also enjoying an upturn in risk sentiment, with a strengthening economy as its catalyst.

GFT, on the other hand, noted:

This past week’s developments are a perfect example of the challenge that the Greek situation poses for countries across the Eurozone, the European Central Bank, rating agencies, and investors around the world. To say that it is complicated is an understatement.

On Thursday, investors became very excited when various news sources reported that the ECB was prepared to swap its existing Greek bonds for new ones. As one of the major obstacles to the restructuring of Greek debt, this sign of progress was received warmly.

Many European officials say they plan to approve a second bailout for Greece in days with some adding specifically that a decision will be at Monday’s Eurogroup meeting. Unfortunately there is still fear that the ECB’s Greek bond swap deal could trigger a default designation by rating agencies if the central bank ends up selling their bonds at their original purchase price, which would be lower than its face value.

So far the ECB has yet to confirm the structure of their bond swap deal even though Eurozone officials have said that the swap has been completed.

Another way a credit event (read – default) could be triggered would be if the Greek Parliament passes legislation that activates the Collective Action Clause (CAC), forcing all bond holders to agree to debt restructuring. This is not only possible but probable considering that the Greeks have already decided that this is legal because the chance of them convincing 100 percent of bond holders to agree to any Private Sector deal is slim.

Meanwhile RBS reported:

Flows were generally light today (Friday) as there were no great surprises in the CPI and leading indicators data. S&P futures had another good day and crept closer to 3-year highs. As always, the headlines out of Europe kept everyone in rapt attention and mostly sitting on hands pending Monday's purported meetings and agreements.

We had hedge fund selling and real$ buying in 10's along with another real$ buyer in 30yrs. My inter-dealer volume numbers tell me that the 3yr note saw the highest relative activity at 148% of their 30-day average volume even though we had no large trades in the issue.

In swaps we had hedge fund buying in 5y and 10y spreads. Total Treasury broker volume was 98% of the 10-day average as of 4pm.