Euro rallies even as Greek debt talks drag

Disappointment that the weekend failed to deliver a Greek debt deal kept recent risk asset optimism in check only briefly at the start of the week. By the mid-point of the global session, the euro had started to rally and equities pushed back to multi-month highs as traders reasoned an agreement between Athens and its creditors would ultimately be reached.

The FTSE All-World stock index is up 0.4%, industrial commodities are advancing and some funds are moving out of US Treasuries, nudging the 10-year yield to new two-week highs, up 5 basis points to 2.07%. The dollar index, usually a reliable inverse gauge for risk appetite, is down 0.5%.

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With many Asian markets closed for the lunar new year holiday, Europe inherited a generally lacklustre session. One standout feature was a burst of buying in Japan-based gold futures, which has helped the cash market to breach resistance at USD 1,666 an ounce. The bullion is now up 0.8% to USD 1,670 an ounce.

But after a soft start, the FTSE Eurofirst 300 index has gathered steam, gaining 0.3% and led by a 2% climb for the regional banking index as traders returned to recently winning strategies.

The overall tone is in keeping with the ebullience witnessed for a large part of the first three weeks of the year. Wall Street's S&P 500 has opened little changed and thus hovering at a six-month peak, having already gained 4.6% in 2012 and nearly 20% from its October lows.

That advance has been predicated on hopes that the eurozone debt crisis is ebbing after some relatively well-received sovereign bond auctions helped lower national bond yields; better economic data in the US; and, on balance, a positive fourth-quarter earnings season.

But the euro's initial performance on Monday illustrated that the former of those three factors retains the ability to raise investor anxiety. The single currency hit a session low of USD 1.2872, down from Friday's close of USD 1.2937 as dealers expressed exasperation that an agreement between Athens and its creditors, which many believe is necessary to stave off a Greek default, had not been achieved.

More speculative investors remain bearish on the euro. Net "short" contracts in US-based currency futures hit another record level in the week ending January 17, according to the latest Commodity Futures Trading Commission data.

It therefore will have been painful for anyone holding such positions when the single currency started to find its footing as the European day progressed. The euro is now USD 1.3014, back above the USD 1.30 mark for the first time since January 4, as stress within the eurozone credit complex continues to ease. The yield on 10-year Italian paper, for example, is down 16 basis points to 6.09%, a seven week low.

Traders will be keeping their eyes on any news out of the Greek debt talks and also a meeting of eurozone finance ministers later on Monday, which will discuss Greek debt restructuring and second bailout package.

Brent crude is up 0.8% to USD 110.75 as the market absorbs developments regarding Europe's economic sanctions against Iran, moves taken in protest at Tehran's nuclear ambitions.

Earlier, the Asian session was typified by a 0.01% decline for Tokyo's Nikkei 225. The FTSE Asia-Pacific index rose 0.3% as Shanghai, Hong Kong and Seoul were among those shut for new year celebrations.