Grexit, China growth fears weigh on European assets

By John Geddie

LONDON (Reuters) – European stocks dipped and low-rated bond yields rose on Monday after dismal Chinese trade data and signs of increasingly fraught relations between Greece and its international creditors inflamed market tensions.

The dollar gave up some of the ground it made against other major currencies on Friday after strong jobs data brought forward expectations of when the U.S. interest rates might rise.

In Europe, eyes were on Greece after Prime Minister Alexis Tsipras on Sunday ruled out extending the country’s bailout and said he would reverse some of the reforms imposed by its lenders, jeopardizing its finances and its place in the euro club.

His speech came after Standard & Poor’s on Friday cut Greece’s sovereign debt rating and Moody’s put its rating on review for downgrade.

“The immediate headline reaction was that this speech would make it much more difficult for Greece to come to an agreement with its European partners and thus the risk of Greece leaving the euro zone was now higher than ever,” said Gary Jenkins, chief credit strategist at LNG Capital.

Jenkins said there was now a 50 percent chance of a ‘Grexit’.

Athens’ stock market slipped around 5 percent <.ATG> and, with the European Central Bank set to pull the plug on its funding to Greek banks on Wednesday, the country’s banking index was down around 8.5 percent.

Broader European shares tracked earlier losses in Asia. The pan-European FTSEurofirst 300 index <.FTEU3> fell 1.1 percent, with Germany’s DAX down 1.6 percent <.GDAXI>, France’s CAC down 0.9 percent <.FCHI> and Britain’s FTSE down 0.8 percent <.FTSE>.

Greek 10-year bond yields shot up 87 basis points to 11.3 percent, while three-year yields rose to around 20 percent.

Fallout for other low-rated bonds was relatively contained with Portuguese, Italian and Spanish equivalents up between 4-8 basis points while top-rated German Bund yields dipped 4 bps to 0.34 pct.

There is a 40 percent chance that 10-year German bond yields could turn negative this year, said RBS on Monday, with the Greek situation accelerating a move caused by the European Central Bank’s upcoming bond-buying scheme.

“Turbulence from Greece helps Bunds to perform and accelerates the fall in yields towards zero,” said Marco Brancolini, a rates strategist at RBS.

UGLY DATA

China’s trade performance slumped in January, data on Sunday showed, with exports falling 3.3 percent from a year ago while imports tumbled 19.9 percent, far more than analysts had expected, highlighting deepening weakness in the world’s second-largest economy.

“The trade data is ugly, which points to a weaker economy ahead,” said Wang Mingli, strategist at Guoyuan Securities in Shanghai

The poor figures took some of the shine off Friday’s robust U.S. payroll gains of 257,000 in January, which also showed a rebound in hourly wages.

The U.S. data caused traders to move forward their rate hike expectations, with money market futures <0#FF:> fully pricing in an increase by September compared to around October before the data.

The prospect of an earlier U.S. rate hike is weighing on many assets that have benefited from low rates, while boosting U.S. bond yields and underpinning the dollar.

The dollar’s index against a basket of six major currencies held onto most of its 1.1 percent gain on Friday and stood at 94.587 <.DXY> <=USD>, not far from an 11-year high of 95.481 hit last month.

The euro traded at $ 1.1329 , up around 0.1 percent against the dollar.

Oil prices dipped as the slump in Chinese imports pointed to lower fuel demand in the world’s biggest energy consumer. Brent oil futures fell 0.2 percent to $ 57.66 per barrel , off a six-week high of $ 59.06 touched on Friday.

Gold rebounded slightly from a three-week low of $ 1,228.50 per ounce touched on Friday as share prices eased, trading at $ 1,243.20 .

(Additional reporting by Samuel Shen and Kazunori Takada in Shanghai; Editing by Hugh Lawson and John Stonestreet)