May 26, 2015

Markets Today: Tick tock, tick tock

Tick tock, tick tock – that’s both the sound of time passing on one of the quietest days in the markets but also that of the countdown to Greece needing to come to an agreement with its creditors.

Tick Tock, Tick Tock – that’s both the sound of time passing on one of the quietest days in the markets but also that of the countdown to Greece needing to come to an agreement with its creditors. These were the strongest influences last night.

US, UK, German and Hong Kong markets were closed; commodities were generally higher and the USD was stronger. The EUR underperformed, as did much of the Emerging Market complex; while the AUD was pretty much flat.

The irony of the fact that in the days after the passing of the Nobel economist, John Nash, who is known for his work on game theory and sub-optimal equilibrium (I’m going to do this because I think you are going to do that), that Greece and its creditors are digging in on their standoff, is not lost on economists. People ask how there could be an ‘accident’ where Greece defaults, and this is how: both sides believe the other side will back down. And while they are both looking at each other, with an eye to their respective stakeholders; the money flows from Greek banks and the money to pay Greece’s internal obligations (salaries, pensions, etc) and external obligations (IMF, ECB) runs out. For more details please see last week’s note “Greece Scenarios for EUR & AUD, FX Comment, 20 May 2015- ask if you would like a copy)

We’ve been here before (twice) and so markets are relatively complacent but last night there were twinges of concern: Spain’s equity market fell 2% after the ruling austerity party lost many votes in the municipal elections. While, Portugal’s bond yields rose sharply – they are a likely candidate to be taking lots of interest in the Greek negotiations given their own austerity obligations. The EUR is underperforming, and has fallen below 1.10. Thus, expect more volatility in the lead up to the June 5 payment, and while the usual last minute deal, rescue and pushing the can down the road is the central scenario ; the sub-optimal can occur and Nash can tell us why. This matters for Australia as the AUD in particular is vulnerable to volatility and has a high correlation with the EUR in particular.

Fed members were on the tapes overnight; Vice Chair Fischer noted the debate between the competing paths of raising rates: ‘early and gradual or late and steep.’ He appeared to be a backer of the early and gradual, noting that the first hike would just take policy to extremely expansionary from ‘ultra-expansionary.’ But again, he reiterated that the Fed are data dependent and not date dependent. This was also a claim from (non-voter) Mester, although she was relatively upbeat about the economy.

Coming Up

Domestically, we get the weekly consumer confidence numbers; that’s not usually market moving but post the Federal budget it is modestly more important. The NZ Fonterra milk price forecast for 2015/16, due early this week, is likely to be more market moving. There are risks to the forecast (please see our NZ team’s economics note) due to the drought but global supply/ demand is likely to be just as important. The currency always pays attention to this; FWIW.

Moving onto the US, which is back from holidays, we are very clearly back to watching the data. The durable goods orders are volatile, as is the Richmond Fed PMI (and the Dallas one) and house sales but we’ve been told to watch data, so this is what markets will be doing. House price data is slightly more stable, and expected to be relatively steady. The Markit PMI is getting a little more attention these days but not a lot more stable.

The fact that the Fed has pointed the finger at the data, means that every nuance, every up and down, is likely to create volatility. At least we have Vice Chair Fischer speaking, on the global economy, to try and make sense of it all.


On global stock markets, the S&P 500 was closed. Bond markets saw US 10-years unchanged at 2.21%. On commodity markets, Brent crude oil +0.23% to $65.52, gold+0.2% to $1,207, iron ore +2.0% to $61.18. AUD is at 0.7825 and the range was 0.7804 to 0.7846. (For more market prices, please see p.2 of the pdf).

  • Tspiras tells a Greek paper that they will not accept austerity
  • Fed’s Fischer notes the debate between “early and gradual and late and steep” rising interesting rates

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Markets Today – Sweet Spot

Markets Today – Sweet Spot

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Bond markets have been supported by some market-friendly data and while Fed speakers were again mixed, it was the more dovish remarks that captured attention.

Markets Today – Sweet Spot