Relief following Greek developments

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Last week’s events surrounding Greece have led to relief on the financial markets. Without exception, the stock markets climbed, as did the bond markets on Europe’s periphery.

Despite the favourable response to date, the possibility of a Grexit is still present. Ben Steinebach Ben Steinebach Head of Investment Strategy

The change began with the deal that Europe’s government leaders reached on Monday morning, following an all-night meeting. The deal had every appearance of strangling the Greeks, and that was in fact necessary: economic conditions in Greece have gone downhill rapidly, and tougher measures are needed to get the country’s economy back on track. Further developments followed in rapid succession.

On Wednesday Greece’s parliament voted in favour of the deal, even though the opposition provided more votes than the parties making up Syriza. This gave the country access to bridging funds and secured the measures to be implemented immediately: a broader basis and higher rate for VAT, pension reforms, statutory formalisation of semiautomatic austerity measures if economic conditions worsen and independent status for the statistical authority ELSTAT. Parliaments in other countries have yet to give the deal their backing. By Friday only France and Finland had approved it. A great deal would hinge on Friday’s vote in Germany’s Bundestag. At the same time, the IMF continues to urge Greece’s creditors to make the debt more sustainable, which presumably will mean easing the terms (even lower interest and even longer repayment deadlines), as Germany is fiercely against actual relief.

In the meantime the European Central Bank (ECB) has resumed the emergency funding for the Greek banks and approved a further EUR 900 million. According to Mario Draghi, the better part of the Greek government debt – EUR 130 billion of it – is now in ECB hands. Once the national parliaments give the deal their backing, negotiations can begin about a third bailout programme (this time from the ESM, the European Support Mechanism). However, this is not a sure thing yet, particularly with Greece’s economy deteriorating further, and implementing the reforms might also still pose difficulties.

Despite the favourable response to date, the possibility of a Grexit is still present. Nevertheless, the stock markets shot up last week, by around 2% in the United States and generally by twice that in the eurozone. Asia’s markets also continued their recovery, boosted by encouraging Chinese international trade, industrial output, retail data, and most importantly the Q2 Gross Domestic Product (7%). Ten-year yields in Spain and Italy fell by 5 and 18 basis points, respectively, and in Greece by an astonishing 200 basis points.

Other causes for optimism: Iran and the US economy

The international markets were also affected by other developments besides those in Greece: an agreement with Iran about its nuclear programme and Fed Chairwoman Janet Yellen’s semi-annual speech before Congress. The first Q2 corporate earnings were also announced. The deal with Iran met with positive response around the world, including in Iran itself, where the people consider themselves liberated after years of sanctions. Janet Yellen’s speech contained little in the way of news, though she did confirm our prediction that the first Fed Funds Rate hike will take place in September. Last week’s Beige Book, showing the economic situation in the various districts of the Federal Reserve over a six-week period, indicated faster economic growth. This warrants a rapid rate hike, presumably to be followed by further hikes at a very moderate pace.

The corporate earnings for Q2 are also gradually beginning to emerge. Earnings in the US banking sector were mixed: Goldman Sachs and JP Morgan reported strong underlying profits, Citigroup announced slightly lower earnings, while those of Wells Fargo and Bank of America were more or less in line with the forecasts. Intel and Google also reported strong earnings; for the latter, the rapid rise in the number of unique page clicks (30% annually) drew particular attention. Swatch’s earnings were satisfying, though its margins fell slightly short of expectations. The earnings of energy service company Schlumberger, lastly, outperformed the forecasts, owing chiefly to successful cost controls. In North America the margins developed favourably, which comes as a relief in light of the difficulties in the energy sector. In the Netherlands ASML’s earnings matched expectations, and the company announced that it is making progress with EUV, its new technology that should enable mass production of chips. This is a significant development with the demand for chips rising rapidly to connect the huge variety of devices to the Internet. The AEX passed 500 points once more on Thursday (though not by much), up by more than 4% relative to the Friday before.

Corporate news rather than macro news in the spotlight

Although the news from Greece remains important, this week will also see a sharp increase in corporate news. Little regular macro news is expected. The earnings season will gather steam this week, not only predominantly in the United States but also in Europe. General Electric, sometimes regarded as a reflection of the US economy, was scheduled to publish its earnings last Friday. This week we expect announcements by American Express, VISA, IBM, Apple, Microsoft, Boeing, Caterpillar and Coca Cola. In Europe, the principal companies are Novartis, Roche, BASF, SAP and Daimler. In the Netherlands we look forward to the earnings of Unilever, Akzo-Nobel, TomTom, Air France KLM, RELX (formerly Reed Elsevier) and BESI.

For macro news, we must wait until Friday for a series of countries to publish their first estimates of the sentiment among purchasing managers in July. Before then, we will have reports of consumer confidence in the Netherlands and Dutch consumer spending. The policymaking committee of the Bank of England is scheduled to meet this week, and Italy will release data about retail and industrial orders. The EU is set to announce consumer confidence data for July, and the United States will publish the leading indicator. Lastly, Belgium’s central bank will publish data about industrial output and industrial confidence; the latter is regarded by some as an accurate indicator of confidence among European businesses, which will be published later.

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