Capital Markets were promised a final decision on Greece over the weekend. Traders and investors were prepared for the price gap on the open, and instead markets still have to wait until Wednesday for the ultimate outcome.
After another all night session on Sunday, Eurogroup leaders came to a consensus. Europe would give Greece a third multibillion-euro bailout provided that Greece implements more punishing austerity measures over the coming days. Prime Minister Tsipras had no other choice, but provide complete surrender to European demands or otherwise face expulsion from the Eurozone.
Early Monday morning, PM Tsipras yielded to Greece’s main creditors terms and has until this Wednesday to pass into Greek law the key demands, including streamline value-added taxes (VAT), broadening the tax base to increase revenue, and curbing pension costs if his country wants to receive a third bailout package now estimated around €82-86B.
Euro leaders may be happy that a deal was negotiated, but the reality is that Tsipras and his government have to convince the constituency to accept a package that is much harsher than the one that was voted down in the Greek referendum a week ago. The terms are significantly tougher, which makes it harder for both sides to deliver.
Muted Response From Markets
Thus far, Capital Markets initial reaction seems to be the glass “half-full” approach. Euro periphery (Italy, Spain and Portugal) yields have fallen, regional bourses are in the black, while the single unit did find some traction initially, spiking towards €1.1200, but again has reverted back to its funding currency role which is putting pressure on the EUR (€1.1070) ahead of the U.S open.
With some progress being made on Greece, the EUR should be exposed to less volatility in the coming days. This morning’s weakness has more do with outright positions rather than a direct response to Greek events. A considerable amount of EUR ‘short’ positions had been covered over the past week, which had given the currency an underlying bid. Monday’s move lower is again about repositioning of various funding currency strategies.
For now, Capital Markets will have to focus on any ECB commentary and a possible Greek parliament vote later this week. Any signs of stabilization in the EUR could also have the Fed remain on course for a rate hike later this year and provide even more support for the USD.
China in the Black
China’s stock prices continue to demand close attention from the market. Currently, aside from Greece, it remains the risk ‘on or off’ barometer for many investors. However, the recent moves by Chinese authorities to stem the slide of equity prices should give confidence to many to shift their focus towards the Fed and Ms. Yellen’s testimony to congress later this week.
China’s better than expected trade data ($46.5B) in the overnight session pushed the Shanghai Composite to close in the black. The details indicated that the surplus missed consensus exports growth of +2.8%, but was the first headline rise in four-months, and above the +1% expected. Regional exports will be happy that the imports decline was less than the anticipated figure, while shipments to the U.S remained healthy.
Aside from Greece, this is a busy week in North America. In the U.S, tomorrow’s retail sales will dominate the week’s busy calendar. Solid gains for sales, excluding autos, could change some fixed income traders thinking on the timing of the Fed’s first rate hike. First it was June, and then July and now September is being priced out, with December and beyond the front-runner for the first U.S rate hike in nearly ten-years.
Wednesday will follow with U.S industrial production, which will offer the first definitive look at last month’s factory sector. Any positives from either release will have analysts readjusting their assessment for Q2 in the U.S. In Canada, the Bank of Canada (BoC) makes its rate announcement.
The BoC’s Governor Stephen Poloz is expected to follow the dovish lead of central banks of other commodity-based economies like the RBA and Reserve Bank of New Zealand. The BoC is expected to cut its growth forecasts and frame the economy’s recent data deterioration as a vindication for the unexpected rate cut six-months ago.
Currently, fixed-income traders are pricing in a 100% chance of a -25 basis points cut by October (51.3), and they’re now starting to price in another cut in December (47.5), albeit a small chance.
Investors continue to look for clear sign on timing for rate lift off in the U.S. The Fed’s Ms. Yellen testifies mid-week in front of the House Financial and Banking Committees. As per usual, expect markets to be hanging on her every word. Later in the week U.S housing data will dominate, along with a heavy run of inflation data, from import prices to consumer prices.
