Financial markets have largely taken the cancellation of a meeting designed to rubber-stamp an aid deal for Greece in their stride Wednesday, as sentiment is aided by stronger-than-expected economic data in France and Germany along with hopes that China will play a greater role in defusing the debt crisis roiling the region.
But some analysts wondered if the markets were too relaxed in their approach, given the paucity of time to tie up loose ends in a Greek aid deal ahead of a bond redemption in March that Greece can't afford to meet.
"There is very little evidence of stress in currency markets," said Kit Juckes, the chief currencies analyst at Societe Generale SA in London. "I am astonished by such insouciance in the face of such a strained relationship between Greece and the rest of the euro zone."
Safe-haven German bund prices fell, while Italian and Spanish bond yields came off earlier highs. In the foreign-exchange market the euro was steady around $1.3150 against the dollar, buoyed by further signs that China is set to invest in euro-zone assets.
March Bund futures contracts fell 27 ticks to 138.25, while the 10-year Italian bond yield was up 3.5 basis points at 5.59%, off an earlier high of 5.64%.
Trading volumes were thin across markets with dealers citing half-term school holidays for the decline in activity.
London's FTSE 100 was up 0.3%, Paris's CAC-40 was up 1%, and Frankfurt's DAX was 1.3% higher at 6795.34.
"We are in limbo at the moment as the market is awaiting clarity. We are in a two-way market though and one has to respect the risk-on move," said Andrew Roberts, head of European rates strategy at the Royal Bank of Scotland Group PLC.
A meeting of euro-zone finance ministers scheduled for Wednesday has been cancelled and has been replaced by a conference call, set for 1600 GMT. European leaders are demanding pledges from Greek politicians that they won't abandon the austerity drive after the elections later this year. Greece is also yet to spell out how it will make EUR325 million of additional savings demanded by international creditors.
For now, market participants are focusing on stronger-than-expected economic data in Germany and France, the euro zone's two largest economies. France defied expectations of a contraction in activity, with data showing the economy eking out a 0.2% growth rate in the forth quarter. While the German economy slumped in the same period, the contraction wasn't as sharp as economists had anticipated.
Yields on Italian and Spanish bonds have fallen dramatically in recent weeks to trade close to their lowest levels in a year as banks put plentiful cash to work and traders expect a generous takeup at the European Central Bank's three-year liquidity operation later this month.
Comments from People's Bank of China Governor Zhou Xiaochuan also lifted assets perceived to be risky, after he said China will increase its holdings of euro-denominated assets. To be sure, Chinese officials have indicated their willingness to play a part in rescue efforts in the euro zone although follow up action has been thin on the ground.
While financial markets are steady Wednesday, the situation in Greece still remains uncertain with an aid deal yet to be signed off ahead of the EUR14.4 billion bond redemption March 20. There is also a risk that participation levels in the Greek debt swap may fall short of acceptable levels. That may force the Greek government to activate collective action clauses on Greek bonds to coerce investors, and this will probably trigger payouts of credit default swaps.
Data for other euro-zone economies were less encouraging, with Italy entering into a technical recession and some analysts said the sanguine mood may well be tested.
"We expect the market to scale back at least some of its rather complacent attitude towards the still rather small but growing risk about a Greek 'accident', as doubts about a smooth implementation of a number of time-sensitive events are likely to increase," said David Schnautz, fixed-income strategist at Commerzbank AG in London.
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