Markets Today: Waiting for Godot

By Emma Lawson

Except he never came. We wait, there is a vast amount of commentary and expectation, and even a fair degree of optimism. And nothing might happen for a few days at least. But in this case, there will be an endpoint. Markets were mostly pleased, with equity markets in Europe up strongly (Germany almost 4%). Yields also rose in the US and Germany, with periphery yields lower. Currency markets were far more muted, with the USD rallying, the NZD and AUD underperforming. The EUR was slightly lower, after rising to 1.14 earlier in the day. Commodities were also restrained and iron ore continues its run lower.

There is a huge amount of attention on the negotiations between Greece and its creditors and I am afraid that it is going to continue. The next focal point will be Thursday, but that won’t stop the stream of headlines, and the subsequent market twists and turns as it tries to make sense of it all.

The news from overnight was mostly positive, if somewhat cloudy. It appears that Greece has put forward a proposal (after first sending the wrong draft – you couldn’t make this up) that is promising for the Troika (the creditors – IMF, ECB, Eurogroup). They are proposing an increase in tax (VAT) and some cuts to low income pensions, with increases in pension contributions. There is only a broad outline, as that is all released, but it seems that negotiations at least have started in earnest. It is a significant fiscal tightening for Greece, suggested to be around E7.9bn, and as such, creditors wish for the proposal to first be passed by the Greek government before it goes to the other European states to be voted on. No point agreeing, if the Greek government then renege. And it is likely that Greece will want some debt relief in return.

That means, that while the news was greeted positively by equity and debt markets overnight, we aren’t quite there yet. Closer, definitely, but not there. The next big meeting of the EU Leaders Summit is on Thursday. And many more headlines between now and then. Remember, the deadline to pay the IMF is on the 30th.

Market reaction has been interesting, suggesting that equity and bond markets were positioned for higher Greek event risk, but the currency markets are not as fussed. The USD rally may be due to the stronger housing data (existing home sales) but that shouldn’t overwhelm the more global events. Positioning, with investors already long EUR, might be a bigger driver.

The AUD underperforming may show the eye on China that investors tend to have. Iron ore prices are lower, and after chatter about a possible PBoC rate cut last weekend never eventuating, and indeed yields moving a little higher, that can dampen the mood in Australia (and NZ).

Coming Up

There is more of the same today. There is little data of note, and what there is may well be overshadowed by the events in Europe. Domestically, we get the barely watched weekly consumer confidence data and Q1 (aka lagging) ABS house price series. Neither have tended to be market moving data.

During the local time zone, the China Markit PMI is released. It has been known to drive the local markets, although less of late. After picking up last month, more improvement is expected but it is expected to remain below the break-even 50 level between economic expansion and contraction. There will be more attention on Chinese yields and equity market today, after the long weekend, and Friday’s weak market.

Markit PMIs are also released for Japan, Germany and Europe. These gain slightly less attention and are expected to be modestly up in the case of Germany, and slightly lower in the case of Japan. Global growth, indicated by the PMIs remains modest, and centred close to the break-even level.

In the US, the durable goods orders have been of interest lately. This is despite their very volatile nature and multiple series with various importance. The headline is expected to remain soft, but the core should improve. With the FOMC very data dependent and sensitive to economic volatility, these releases make a difference to their willingness to raise US interest rates for the first time this cycle.

Overnight

On global stock markets, the S&P 500 was +0.60%. Bond markets saw US 10-years +11.66bp to 2.37%. On commodity markets, Brent crude oil +0.33% to $63.23, gold-1.5% to $1,184, iron ore -2.2% to $60.02. AUD is at 0.7727 and the range was 0.7721 to 0.7797. (For more market prices, please see p.2 of the pdf).