June 22, 2015

Markets Today: Four legs good, two legs bad

Not much happened Friday amid an absence of US data and with no significant developments - at least not in public view - ahead of Monday’s all-important EU Summit.

Not much happened Friday amid an absence of US data and with no significant developments – at least not in public view – ahead of Monday’s all-important EU Summit. The Greek cabinet met Sunday and according to the FT, in a series of phone calls between Greek PM Tsipras, German chancellor Merkel and French President Hollande last night, Tsipras was told not to expect high level negotiations tonight over the substance of a reform plan.  But, the FT says, he was told that if Athens were able to strike a deal in advance of the summit (based, presumably, on a new offer from Athens that Eurozone Finance Ministers – meeting ahead of the summit –  can agree to) then leaders would be willing to discuss including debt relief as part of a new third bailout.

The ECB provided a further EUR1.75bn of ELA assistance to Greek banks on Friday in the face of a reported further EUR1.5bn deposit outflow (and bringing the week-to-date outflow to 5bn) but this was only half the 3.5bn reportedly requested by the National Bank of Greece. The big test of ECB resolve to continue keeping the banking system afloat will come in the immediate wake of the Summit outcome.

The US dollar was little changed Friday (DXY +0.05%, the broader BBDXY +0.15%) with EUR/USD ending the NY session -0.06% at 1.1352 – it has opened this morning slight higher.  AUD/USD ended at 0.7772 (-0.36%), USD/JPY 0.2% lower at Y122.71, NZD -0.25% at 0.6910, and GBP/USD virtually unchanged at 1.5883. The CAD suffered on some weaker than expected retail sales data but losses were limited by a slight upside surprise on CPI.

In bonds, the 10 year Bund was -5.6bps to 0.752%, suggesting safe-haven flow in front of Monday’s Summit. 10yr Treasuries finished -7.7bps at 2.2577%, also likely reflecting safe-haven buying and given relatively hawkish Fed member comments (see below) and an absence of new economic data.

In stocks, after Shanghai finished down 6.4% (and 13.3% on the week, the biggest weekly drop in over 7 years) the Eurostoxx 50 actually eked out a 0.15% gain despite the German Dax dropping 0.54%. Spain (+0.7%) and France (+0.25%) benchmark country indices both rose.  The S&P500 ended -0.53% (and the VIX +0.77 to 13.96). The Dow closed -0.55% and the NASDAQ -0.31%

CFTC FX data for the week ended Tuesday 16 June shows a sharp contraction in the overall USD speculative long vs. G10 currencies, to 215.6k from 312k, its smallest since the week ended 19 May (194.9k). This was EUR, JPY and AUD led with short positions in all three currencies pared significantly.

San Francisco Fed President John Williams said Friday that he expects the Fed to raise rates twice this year (so revealing his ‘dot point’ to be at the median of FOMC members). While saying he continues to be in ‘wait and see’ mode ‘until I have more confidence that inflation will be moving back to 2%’, he added ‘we are getting closer and closer’ to raising rates’.  ‘My own forecast would be having us raise rates two times this year…but that would depend on the data’. (Bloomberg reporting).

Cleveland Fed President Loretta Mester meanwhile said ‘I think the economy can support a 25-point increase in interest rates. However, I also understand the argument that getting a little more confirming data’ before taking action ‘is reasonable as well’. She says ‘I’m probably a little more optimistic about economic developments’ relative to some, and if events play out as expected ‘we are going to start to move rates up this year, while adding it’s ‘hard to determine at this point how many rates increases’ will happen in 2015. (WSJ reporting)

Coming Up

There’s really only one game in town this week, tonight’s Emergency EU summit called last Thursday night by EU President Donald Tusk. Someone has to climb down for a deal to get done (in short, the EU/Germany on debt relief, if not now than down the track, Greek PM Tsipras on deeper pensions reforms). In the cold light of day any deal that gets done may be denounced as unsatisfactory and no more than the all-too familiar kicking of the proverbial can down the road.

Yet market volatility in the latter part of last week – in FX in particular – has taught us that markets this week will, in the short term, react initially in Orwellian fashion, mimicking the initial behaviour of the pigs who overthrew the humans after they took over and renamed the Manor ‘Animal Farm’: “Four legs (deal) good, two legs (Summit failure) bad”. For the AUD, a deal could see EUR/USD lead AUD/USD up to near 0.80, failure could see EUR/USD drag AUD down to below 0.76.

Australia has little of note on its calendar (save the NSW budget on Tuesday). China has the Markit ‘flash’ Manufacturing PMI on Tuesday, and we’ll get the US and Eurozone versions, also on Tuesday.  Housing data, durable goods orders and the personal income, spending and deflator data will also all rate mentions.


On global stock markets, the S&P 500 was -0.50%. Bond markets saw US 10-years -7.68bp to 2.26%. On commodity markets, Brent crude oil -1.93% to $63.02, gold+0.0% to $1,202, iron ore -0.7% to $61.36. AUD is at 0.7766 and the range since Friday’s local close was 0.7737 to 0.7778. (For more market prices, please see p.2 of the pdf).

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For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets


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