The is a growing sense of optimism that a
deal can be struck between Greece and its creditors. There is also a sense that although nearly half of China's
stocks are still frozen, that the
dramatic sell-off is over.
Although we detected the first shift in
psychology on July
8, developments over the past 24-hours have now become
recognizable to all. This has spurred a significant market reaction.
The euro is at its best level since June 30
and is nearing $1.12. Sterling and the Swiss franc have been pulled up
with it. The yen is giving back its haven inspired gains seen earlier
this week. The next hurdle is seen
in the JPY122.70 area. The dollar-bloc
currencies are slightly firmer.
European stocks are higher with the Dow
Jones Stoxx 600 up 1.8% near midday in London, led by a more than 2% rally in
the financials. Peripheral bonds have rallied strongly while core bonds are under pressures,
and the Grexit trades are unwound.
While much has been said of Greek Prime Minister Tsipras, he continues to keep
European officials off-balance. After
getting wide support for rejecting the creditors' conditional for new funds, and
secured support from opposition parties (though Samaras quit as leader of the
opposition New Democracy), Tsipras quickly moved to dismiss his controversial
and divisive finance minister. Apparently with France's assistance, he
has submitted a new proposal that is very similar to that which was rejected
prior to the referendum.
The official creditors will review the
proposal today, but the preliminary signs are favorable, even if there is a bit
more haggling to be done. Assuming the creditors can agree,
then the Eurogroup of finance ministers will decide on Saturday whether it can recommend re-opening negotiations, which would include a bridge loan to make meet
this month's obligations. A special
EU-wide heads of state meeting on Sunday may be
avoided if the Eurogroup decision is positive.
There appear
to be two key issues now. First, over the last couple of weeks the Greek
economy has deteriorated, though it is difficult
to know with any precision. This means that more savings are
needed to reach the same objectives as the previous June 26 deal that Tsipras appears willing to accept now.
Estimates suggest this cost could be another 3.5 bln euros.
Second, is the thorny issue of debt
relief. Here the form is just as important if not more so than the
function. The function is to ensure that
Greece's debt is sustainable. A haircut seems to be the most obvious
measure, but this is politically difficult
and apparently unacceptable. However, there are three other measures that
can achieve a similar result in real terms: extend maturities, reduce
interest rates, and lengthen the time interval before the debt must be serviced.
What does this mean for the bank holiday
and capital controls? Capital controls will likely have to
remain in place longer than the bank holiday. The closure of Greek banks
is nearing a modern record. The ECB meets on Monday, and depending on the
developments over the weekend, may offer begin to unfreeze liquidity for Greek
banks. The deposit withdrawals and deterioration of the loan book may
forces not only a recapitalization of the banks
but also some combination. It is possible
that Greece goes from four large banks to two, There are a number of
forms that ECB assistance can take, but the key point is that provided that
negotiations for a third assistance program can be initiated, the ECB can
resume the functions usually associated with a central bank's
lender-of-last-resort functions.
As many as six national parliaments,
including Germany, need to sanction new negotiations. However, this is seen as largely a
formality if the heads of state and creditors give their approval.
Investors need to keep in mind that a formal deal is not what is being
discussed, so much as exploring whether a basis for new negotiations exists. We expect this to be answered in the affirmative, and this will suffice
to take a big step away from the abyss
that was opening. In our assessment, what the pessimists and cynics got wrong
was misunderstanding the incentive structure facing both the creditors and
Greece. They also under-estimated the power of the political will to
maintain the irrevocable nature of monetary union.
Meanwhile, the other major disruption to
the global capital markets has been the precipitous decline in Chinese stocks. The Chinese government tried several measures to
stabilize the market. Although nearly half the stocks
remain frozen, it appears to bolstered sentiment. Several large foreign
investors have indicated they were buying Chinese shares. The fund
trackers also suggest that China equity ETFs are also experiencing substantial
inflows.
The other important
development has been the jump in Norway's CPI. The headline rose by 0.3%, whereas
the Bloomberg consensus was looking for a 0.4% decline. This pushed the
year-over-year rate to 2.6% from 2.1%. The underlying rate (adjusts for
tax changes and excludes energy) jumped to 3.2% from 2.4%. This is the
highest since 2009. This is important because many had expected that the
Norges Bank would follow up its recent rate cut with another one in September.
Today's data makes this somewhat less likely, and the krone has been rewarded with a nearly 2% advance against
the dollar and nearly 0.75% against the euro.
While European
developments will continue to command much of the focus in North America today,
Fed Chief Yellen's speech on the US economy (with Q&A) will be watched
closely for hints into next week's Congressional testimony. We expect Yellen to give nothing
away. The Fed's assessment that the headwinds that led to the US economic
stagnation in Q1 were temporary looks valid.
Yellen has engineered a shift from a date
focus to a data-dependent path. A July move never seemed likely, but
we expect her not to close the door on a September move. Yellen will likely specify the conditions, which as we know
are continued improvement in the labor market and 'reasonable confidence' that
the inflation target will be met over the
medium term. While recognizing the risks emanating from Greece and China,
as the FOMC minutes showed, we expect Yellen express some optimism that the
worst of these can be avoided.
Week Ending on a Constructive Note
Reviewed by Marc Chandler
on
July 10, 2015
Rating:
Reviewed by Marc Chandler
on
July 10, 2015
Rating:
