July 1, 2015

Markets Today: Default? Does it matter?

Greece has officially missed its payment to the IMF, but markets are seemingly unconcerned. We have passed that mattering for now.

Greece has officially missed its payment to the IMF, but markets are seemingly unconcerned. We have passed that mattering for now. There is so much uncertainty, speculation, truth and partial truth that many markets are in stasis; waiting to see which way this goes. We may have an answer Monday morning, we may not. Expect more of the same.

In the US equities rose, while they remained under pressure in the EU. Yields were lower, including in the European periphery, while gold and iron ore were lower. The USD was supported, with AUD the outperformer and the NZD the underperformer (no news); EUR was lower. But overall, moves were generally somewhat modest.

We get more noise tonight, with the ECB meeting to discuss its liquidity assistance (ELA) program for Greece. Most analysis suggests they will not do anything to worsen the situation, but it is likely to remain frozen; watch for haircuts to collateral. And there is also a 9:30am GMT meeting of the Eurogroup to discuss the situation.

Overnight, Greece’s Tspiras put forward a new proposal to the Institutions to get a two year funding deal, but with no reforms. That was rejected. Germany’s Merkel said that there would be no negotiations before the referendum. That is a strong line, and we know that all sides are talking (not always to each other). But overall, we are no further ahead. There was a massive rally in Athens in support for the Yes vote; that is likely to gain support into the weekend but the outcome remains uncertain as of now.

There was actually some data released, but not much attention is being paid to it. European CPI was as expected at 0.8%A, E, 0.9P. In the US the data was mostly positive, with consumer confidence up sharply and house prices rose. The Chicago PMI was not up as much as expected but still rising.

Chinese equities ranged from -5% to +5% over the course of yesterday. The massive swings continue and this brings about uncertainty. There were also further reverse repos to lower yields and ease financial conditions yesterday. These moves have been rapid, but most believe that there is a PBoC ‘put’ which will win out and support the economy. So no reaction elsewhere either.

The new age of central banks/governments to the rescue is creating an interesting phenomenon of muted or only positive reactions to adverse events.

Coming Up

Just to add to the fun, it’s the first day of the new month, the quarter and the new financial year in Australia.

There are limited domestic releases today, building approvals being the key one, but June house prices and commodity prices are also released.

Key for markets will be the China manufacturing index. These have been very stable of late, and less market moving, but they are still important. The official series is expected to marginally improve.

Japan’s Tankan survey is one of the only reliable JPY market moving series. That is out today and expected to show an improvement in the manufacturing outlook. The current series is expected to be flat. JPY has rallied strongly since the announcement of the Greek referendum – one of the only G10 currencies to have a sustained reaction to the events. A better than expected outcome here would add to that strength as it lowers the probability of further BoJ easing.

The European PMIs are likely to be irrelevant in the context of uncertainty surrounding Greece, but the UK series is keenly watched by markets. That is expected to improve; and with a change in the BoE’s bias, better data here may support GBP.

Finally, the US ISM is released and is also expected to improve. This series has been less market moving of late, perhaps due to the multitude of similar series, but it remains a valid gauge of the likely path of growth ahead. A very strong outcome might be the surprise and be enough to re-establish the USD’s support.

The ADP series has lost most of its shine; payrolls are released Thursday this week but today’s ADP is largely a guide to last months’ payrolls and should be treated as such.

The Fed’s Bullard (non-voting hawk) is speaking on the US economy; markets are looking with uncertainty regarding the Fed’s ability to hike if there is volatility in the euro area.

The risk lie in any reminder from the Fed that the economy is strong enough – or indeed the data itself is strong enough – to remind markets that the Fed are ready to act.


On global stock markets, the S&P 500 was +0.30%. Bond markets saw US 10-years +2.71bp to 2.35%. On commodity markets, Brent crude oil +2.31% to $63.44, gold-0.6% to $1,171, iron ore  -3.2% to $59.35. AUD is at 0.7707 and the range was 0.766 to 0.7724.

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