Consolidation Awaiting Fresh Developments

The US dollar, stocks, and bonds are largely moving within yesterday's ranges as investors wait for fresh developments.  A notable exception to this generalization is oil prices.  News of a potential agreement with Iran weighs on prices as it is seen bringing new supply into the already oversupplied market.  

The Greek drama turns to Syriza government attempting to secure parliamentary approval for the tentative agreement with European finance ministers.   In essence, Europe has demanded that Tsipras to implement everything the past governments promised to do but didn't.   This includes the 50 bln euro privatization fund, which less than 10% of which was actualized. 

The agreement with Europe will likely cost Tsipras his job and government.  The defects from this coalition means the government cannot survive.  The most likely scenario is for the President to appoint a technocrat interim Prime Minister, whose chief mission is to begin implementing the new/old program.  A cross-party cabinet would be created.  Elections, in this scenario, would likely take place later this year.

The Greek parliament will take up the legislation tomorrow.  In the meantime, we note that Greece has paid the remainder of the maturing samurai bond (~JPY11.7 bln or $94 mln), avoiding the potential default.   While Greece may move off of center stage, we are misgivings about the agreement, and suspect the challenge posed by Greece (debt and competitiveness) will reemerge.  

In addition to Greece, the trajectory of US monetary policy has been another factor shaping the investment climate.  Yellen begins her Congressional testimony tomorrow (another reason for consolidation today).  She stuck to her script last week regarding scope for 1-2 rate hikes this year provided slack in the labor market continues to be absorbed.  There is no reason to expect a substantive change.  

The US reports June retail sales today.  May's 1.2% headline increase will not be repeated.  US retail sales have been stronger than appreciated.  The three-month average is 1.0%, which is the strongest since April 2014.  The consensus is for a 0.3% increase in June, which would match this year's average.  The component used for GDP calculations is expected to be up 0.3%.   The Atlanta Fed's GDPNow has been steadily rising and now estimates Q2 GDP at 2.3%.  

The Swedish krona and Norwegian krone are the weakest of the majors today.  Sweden was pressured by the unexpectedly large fall in June CPI.  The headline fell 0.3%, bringing the year-over-year rate to -0.4%, twice what the consensus expected.   The underlying rate (uses fixed rate mortgage interest rates) fell to 0.6% from 1.0%.  This matches the lowest level of the year.  The euro is at the upper end of its nearly four-month trading range against the Swedish krona.  A convincing move above SEK9.40 would whet appetites for SEK9.50.   

The Norwegian krone is being dragged by lower oil prices.  The euro is testing the NOK9.0 area and looks set to return toward last week's high near NOK9.15.  

 The Canadian dollar is also being pushed lower, helped by the drop in oil prices, but also ahead of tomorrow's Bank of Canada meeting.  The Bloomberg consensus has shifted toward a rate cut.  We suspect that the Canadian dollar could bounce on a rate cut on ideas that it is the last one.  Perhaps it would be partly sell the rumor buy the fact.  On the other hand, the failure to deliver a cut would likely lead to renewed selling as the likelihood of easier policy hangs over the market.  

Sterling has rallied in the UK morning.  It was not due the inflation report that saw headline CPI slip back to zero from 0.1%.  The core rate eased to 0.8%, its lowest level since 2001.  Rather BOE Governor Carney's hawkish comments lifted sterling from below yesterday's lows toward it highs just below $1.560.  

Chinese equities were narrowly mixed.  The Shanghai Composite slipped 1.2%.  It had rallied 13% over the past three sessions.  A little more than a quarter of the issues were still suspended, according to Bloomberg.   The Shenzhen Composite rose 1.4%.   Margin use rose yesterday for the second consecutive session.  On the Shanghai market margin use rose 0.2% on Monday to CNY934 bln (~$150 bln).  Separately China reported a larger than expected rise in aggregate financing (CNY1.86 trillion).  

PBOC reserves fell by about $40 bln in Q2, the fourth consecutive quarterly decline.  The impact of valuation is difficult to determine.  The euro and other reserve currencies gained against the dollar in Q2, which would put upward pressure on the dollar value of reserves.  On the other hand, the slide in bond prices may have offset this.  Tomorrow China will report Q2 GDP.  It is expected to be just below 7%.  Given that June exports, reported yesterday, were stronger than expected, and today's aggregate financing figures were above the most bullish forecasts, there may be scope for a small upside surprise. 

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