After seventeen hours talk, Greece and the EU have finally reached an ‘agreement’ with a too- strong German zest to seem balanced however. The deal consists of a series of tougher austerity measures that have been rejected by the Greek population a week earlier. From a political point of view, Greek PM Tsipras treads a narrow path. Defeated, Alexis Tsipras should now go back to his Parliament and get the final approval by Wednesday in order to kick-off discussions for the third bailout at the cost of a 50 billion euro fund and democracy.
The euro dream costs 50 billion euro
One of the major highlights of the agreement has been the creation of a 50 billion euro fund of Greek assets to be monetized in order to solidify Greek finances and make sure that country’s debt become sustainable in the future. Half of this mount will serve to capitalise Greek banks, 12.5 billion euro will be used to reduce country’s debt and the remaining 12.5 billion euro will be invested to support economic growth.
Greece will vote on Wednesday to concretise an agreement before July 19. Greece should pay 3.5 billion euro to the ECB by July 20th. If the Greek Parliament could agree on prior actions by Wednesday, the ECB should push back the repayment deadline, keeping Greece away from another default at least in the shortest term.
Risk of political contagion
The knee-jerk optimism following the agreement will certainly remain short-lived as the financial deal will certainly not be a relief on the political front. The sovereignty of the EU members is highly questionable after Greece accepted a very costly deal to be able to stay in the Eurozone. The risk of a political contagion should intensify as the price to use euro may become increasingly unstainable. The anti-austerity echoes will inevitably be the next challenge to euro’s ‘irreversibility’.
Market remains sceptical
EUR complex and the European equity indices gapped down at the open for the third consecutive week as the early trading hours saw no deal going through. As soon as ‘good’ news hit the market, the EUR/USD advanced to 1.12 marker. Unable to consolidate gains, the pair heads south on stodgy Greek agreement. The European equity markets trade in positive territories, the Eurozone sovereigns hint at a temporary relief. The volatilities are expected to be two sided however as politically, the situation could hardly be called ideal.
And the Fed?
While everybody wonders how and if the Greek turmoil and the slowdown in China could affect the Fed’s policy path, Fed Chair Yellen’s speech on Friday revived the Fed hawks. Yellen said it would be appropriate to begin raising rates at some point later this year, while unanticipated developments (Grexit, China slowdown?) could delay or accelerate the first step.
Relief Rally Ensues As Greece gives in to Institutions
It turns out that locking Eurozone representatives in a room for 17 hours can produce some sort of resolution. Why this didn’t happen before now is anyone’s guess.
Financial markets seem reasonably pleased with the FTSE adding 0.5%, the DAX up some 1.34% and the CAC gaining 1.8%. In fact the DAX has added around 8% since touching a low of 10640 on the 8th of July.
But we have been here before and we’re already off the highs.
Eurozone bond yields, never all that perturbed by the whole debacle have fallen back on this morning’s developments including that of Greece. The Hellenic yield curve remains inverted and it’s pretty to remain that way for some time to come.
The euro has also displayed it’s uncanny resilience to the crisis and despite a foray higher relief rally style, it has pared the gains against the greenback. Now trading at 1.1070 having pressed to a low of 1.1054, options barriers reside each side and one gets the sense that any direction from here will be dollar driven rather than emanating from Europe.
The political damage done over the last few weeks is much harder to quantify. The fallout will become evident over time.
The fact that Chinese exports rose for the first time in four months has given some cheer to Asian markets too. It’s hoped that this, along with the stimulus provided by fiscal and monetary easing, will lead to a more understated contraction in growth. More details will become available on Wednesday. Annual GDP is expected to fall below 7% and industrial production and fixed asset investment are also expected to show contraction.
Nobody seems to have told the metals and mining sector of the FTSE that this is the case; it’s amongst the worst performing sectors this morning. Gold prices were never elevated on the ongoing talks, even when Grexit seemed imminent but it continues to decline this morning and may well push lower. The March lows around the $1140/oz mark will need to hold otherwise a move towards the $1000 marker is a likely target.
Fresnillo (LONDON:FRES) is on the bottom of the index, down 0.45% as is Randgold Resources (LONDON:RRS), despite a broker upgrade from Numis.
The healthcare sector, normally the preserve of the cautious investor, is up 1.3%. Shire Plc (LONDON:SHP) is the top gainer, benefitting from a buy reiteration from Deutsche Bank (XETRA:DBKGn) last week.
We’re calling the DOW higher by 122 points to 17882.