The global financial markets were significantly down at the start of last week. The main reason was the Greek government’s unilateral decision to end the negotiations, coupled with its announcement of a referendum.
Developments during the early part of this week will undoubtedly be dictated by the outcome of the Greek referendum
Ben Steinebach Head of Investment Strategy
The Greek government’s decision to walk out of the negotiations came as a surprise, after the parties (Greece’s government and the finance ministers of the eurozone) appeared to have found some common ground. The announcement that a referendum would be held on Sunday was an even greater surprise, as was Prime Minister Tsipras’s advice to his people to vote against the eurogroup’s latest offer. Even more curious was the statement by Tsipras himself later in the week that he was prepared to accept that same offer almost in its entirely. No real panic emerged on Monday, although the European markets fell by 3.5% to 5%. The response from the European Central Bank (ECB) was unsurprising: it froze its emergency bank assistance (at present totalling around EUR 90 billion), causing immediate liquidity problems for those banks. Greece’s government responded by imposing capital controls and limiting the maximum that Greek citizens could withdraw to EUR 60 per day.
For the remainder of the week Europe’s stock markets remained stable at the slightly lower level. The bond markets in Europe’s core countries plummeted on Monday, yet subsequently returned to their pre-weekend levels. The southern European markets did not climb, however, and interest rates rose. As a result the differences with Germany’s interest rates grew. Spain and Italy experienced increases of 20 basis points on balance, while in Greece the 10-year yield soared by more than 350 basis points to 14.8%. Essentially the developments surrounding Greece dictated the entire tone of the financial markets.
Macroeconomic news: no surprises
The remaining financial and economic news was relatively predictable: on the whole data from the United States and Europe were encouraging while the economic indicators in emerging markets were disappointing. For example, the sentiment among purchasing managers was down slightly in the US while remaining relatively high, and Europe’s somewhat lower score showed a slight improvement. Developments were particularly disappointing in Asia’s emerging markets. Aside from this, the most important news items were the latest inflation figures for the eurozone and employment in the United States. Provisional data show inflation in the eurozone falling slightly in June, down to 0.2% against 0.3% in May. This was as expected, however, and inflation should rise slightly during H2, when price increases are measured against the lower levels during the corresponding months in 2014. In the United States non-farm payroll, up by 223,000 in June, fell slightly short of expectations. Despite a downward adjustment to the number of new jobs in April and May by a total of 60,000, unemployment continued to fall, down from 5.5% of the working population in May to 5.3% in June.
The US stock markets lost a little more than 1% last week. This was much less than in Europe, where losses were as high as 3.5% (Germany) and even 5% (Italy). In the Netherlands, the AEX fell 3.5% relative to the week before, closing at just below 477 points on Thursday. The only meaningful corporate news was Ahold’s acquisition of Delhaize of Belgium.
Corporate earnings season set to begin
Developments during the early part of this week will undoubtedly be dictated by the outcome of the Greek referendum. Other news will include the first Q2 earnings. It was unclear on Friday whether Greece would have a result on its referendum on Sunday night, and uncertainty and considerable volatility on the markets were predicted if the result was not clear before the markets opened on Monday. The rest of this week will be determined by the implications of the referendum. If the majority of the Greek people voted ‘yes’ (and accept the eurogroup’s latest offer) an accord would likely soon follow. The Greek ‘no’ strengthens the position of Prime Minister Tsipras, yet an exit from the eurozone is presumably only to be a matter of time. It is also unclear whether the country will then adopt a separate currency of its own or continue to use the euro (similar to the situation in Montenegro). However, economic reforms will again be necessary in the latter scenario, as the country will be forced to buy euros from the ECB, which will be expensive.
In macroeconomic news this week will see some interesting data and events, though they will go largely unnoticed as the Greek situation develops. Germany, for example, will release new data about factory orders and industrial output in May. France, Italy and the Netherlands are also set to publish their latest data about that month’s industrial output. New information will also be released about the leading economic indicators in the European Union, and about Japan’s machinery orders. News is also expected from central banks: in the US the Federal Reserve will publish the minutes of its June meeting, while the Bank of England will have a regular policy meeting on Thursday and the Executive Board of the ECB is scheduled to meet on 16 July. It would be easy to overlook the start of the Q2 earnings season this week. Samsung Electronics will open the season on Tuesday, while aluminium producer Alcoa – which traditionally kicks off the earnings season – will have to wait until Wednesday. Walgreen and Pepsico are scheduled to announce their Q2 earnings later in the week.