Greek drama rapidly approaching climax

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Greece continues to dominate the sentiment on the global financial markets. Another factor is the anticipation of an imminent rate hike in the United States.

It remains to be seen how the Greek drama will unfold this week Ben Steinebach Ben Steinebach Head of Investment Strategy

At a meeting last Thursday the Eurogroup (the finance ministers of eurozone, led by Jeroen Dijsselbloem of the Netherlands) again failed to reach a deal with Greece. In the meantime the Greek banks are seeing their deposits draining away at a rapid pace. The emergency funding from Greece’s central bank (which requires the European Central Bank’s approval) is barely enough to compensate for the outflow. On Friday the ECB held an emergency meeting to discuss the problems that have emerged, and this Monday the most important European heads of government are meeting at an emergency summit. The mix is perfect for a sense of crisis. Although both German Chancellor Merkel and Greek Prime Minister Tsipras have announced that a deal is still on the books, anything might happen and a great deal will depend on whether the various negotiators can maintain their control, including and in particular those from the ECB and the IMF. With IMF Managing Director Lagarde having announced that Greece must meet its obligations before the month’s end, the endplay in the Greek drama might just come to a climax over the next fortnight.

The financial markets are responding to the uncertainty by fluctuating wildly, and on balance Europe’s stock markets fell significantly last week. The pattern on the bond markets was less uniform. Ten-year yields fell in Europe’s northern countries, and to a lesser extent also in the United States, yet on the periphery of Europe interest rates in fact climbed amid investors’ fears for contamination by Greece’s problems. Developments on the markets in the United States were dominated by the outcome of a meeting of the FOMC, the policymaking committee of the Federal Reserve. The Fed expects the US economy to continue to grow at a moderate pace. A first rate hike in September remains likely, with a further hike presumably following later this year. This will buoy the US capital market and give it a boost relative to its European counterpart, and allow the dollar to gain in strength compared with the euro.

Fluctuating sentiment on the markets

Movement on the stock markets in the US and Europe went in opposite directions. The sentiment was determined by Greece and by the Federal Reserve. The macroeconomic news was mixed, yet had little impact. On balance the leading US markets ended the week positively, having initially performed poorly, and on average closed 1-1.5% higher on Thursday than the Friday before. In Europe, conversely, the markets fell 1-2% as the mood surrounding the Greek situation began to feel more and more like a crisis. In the United States, industry proved to be developing less strongly than expected. Output was down 0.2% in May, where it had been expected to increase by a similar rate. In addition, contrary to previous expectations, the Empire State Manufacturing Index – an early indicator of industry in the New York region – was announced to be down in June. Germany also published a disappointing indicator: the ZEW Index, which shows how investors view the German economy, fell for the third consecutive month, and by more than had been expected. Despite this, though, the index remains comfortably above the long-term average.

Some good news also emerged. Consumer confidence in the Netherlands is up in June, presumably following the encouraging reports about the Dutch economy, and unlike in the New York region manufacturing activity in the Philadelphia region was announced to have recovered in June. The Philly Fed Index, which is based on that activity, climbed from 6.7 to 15.2 where it had been projected to reach 8. In the absence of meaningful corporate news, Greece continued to dominate the sentiment on the European stock markets. In the Netherlands the AEX was propelled back and forth wildly, and on Thursday in fact briefly fell below 470 points. On Friday morning the sentiment improved once more and the index climbed to 477 points.

Sentiment set to be dominated by Greece during the weeks to come

Summits will continue to feed the sense of crisis. It remains to be seen how the Greek drama will unfold this week. Little news is expected from listed companies. However, some interesting macro data will be announced. This week’s macroeconomic news will be dominated by the initial estimates of sentiment among purchasing managers in all the important countries. New data will also be released about the US housing market: the sales of both existing homes and new homes in May are set to be published. Expectations are high, as evidenced by the encouraging indications from the Fed. The Ifo Index for June should also be interesting, offering as it does the best measure for business confidence in Germany. Business confidence in the Netherlands and Belgium will also be announced, and is a fair predictor of confidence in other European countries. In addition, various countries – including the United States and the Netherlands – will present their most recent data about Q1 economic growth. In the United States durable goods orders in May and consumer confidence from the University of Michigan will be announced. Lastly, Germany and France are also scheduled to present new data about consumer confidence in June, which might tell us whether the Greek drama is affecting the sentiment among European consumers.


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