Deadlines Come and Go, Markets Endure

Greece has formally fallen into arrears with the IMF, and the second aid package has expired.  The markets have taken it in stride. 

  • Greece has formally fallen into arrears with the IMF and the second aid package has expired, but recent reports suggest Greece is willing to accept the conditions
  • This seeming reversal by Tsipras will likely annoy the official creditors as it underscores that there was no reason to end negotiations
  • Overnight data highlights include stronger Japanese Tankan survey, Chinese PMIs showing the relative strength of the service industry, and as expected Eurozone PMIs
  • Korea trade balance rose to another record high in June, though both imports and exports fell

Price action:  The dollar is mostly stronger on the day.  After trending lower since yesterday, the euro bounced off the $1.1100 level following positive Greece headlines.  Sterling, however, broke below this week’s range to around $1.5650.  The dollar is testing the ¥123 level against the yen.  EM currencies are mixed in narrow moves.  Despite the 5.2% fall in the Shanghai Composite, Asian equities were mostly stronger overnight with the Nikkei up 0.5%.  Euro Stoxx 600 is up 1.5% near midday, while S&P futures are pointing to a higher open.  Sovereign debt yields are mixed, rising in the US and core EU countries, while falling in Portugal, Spain, and Italy.  Greek 10-year yields are down 5 bp.

  • Greece has formally fallen into arrears with the IMF, and the second aid package has expired.  The markets have taken it in stride.  The euro was briefly pushed below $1.1100 but snapped back quickly amid reports that Greece is willing to accept most of creditors’ conditions.  The euro bounced almost three-quarters of a cent on the headlines, but it likely reflects more short-term market positioning than a serious new development.
  • As we have noted, the European creditors and the Greek government were fairly close to an agreement prior.  For all the talk of Syriza being radical, it was willing to accept around 90% of the creditors demands.  This basis of one of the criticisms of the referendum:  the government wants to Greek people to reject the creditors’ proposal even though it supports the lion’s share of it.
  • This seeming reversal by Tsipras will likely annoy the official creditors as it underscores that there was no reason to end negotiations.  It will not bolster the sorely lacking trust.  Indeed, it shows that despite the polls suggesting that the “no” vote is ahead, the Syriza government is flailing.  As of late yesterday, Merkel rejected new negotiations until after the referendum.  Due to the unpredictable nature of Syriza, we suggest that is still a modest chance that the referendum is called off at the last minute.
  • The Greek drama is still the main focus though there has been the usual beginning of the month survey data.  The highlights include a stronger than expected Japanese Tankan survey, especially for large companies, as capex plans were hiked to 9.3% from a -1.2% fall in the March survey.  Small businesses are still struggling, but the case of an expansion in the BOJ’s QE is not to be found here.
  • China’s PMI readings possibly show the transition from manufacturing to services.  The official service PMI rose to 53.8 from 53.2.  This is a four-month high.  The official manufacturing PMI was unchanged at 50.2.  The consensus expected 50.4.  New orders and new export orders weakened further, suggesting no imminent recovery in the manufacturing sector.  The HSBC manufacturing PMI was revised to 49.4 from 49.6 in the flash.  After a rally yesterday, Chinese stocks turned back down today with the Shanghai Composite down 5.2%, reversing early gains to settle on its lows.
  • The eurozone manufacturing PMI was in line with the flash 52.5 reading.  Germany was unchanged from the flash 52.5, and France improved to 50.7 from the 50.5 flash.  Note that this is the first reading above 50 for France since April 2014.  Both Spain and Italy’s manufacturing PMI were softer than expected and below the May readings.  Spain’s manufacturing PMI stood at 54.5, down from 55.8 in May.  Italy’s stood at 54.1, down from 54.8.  The three factors that helped fuel the cyclical recovery (the declines in oil prices, the euro and interest rates) have all been partly reversed.
  • The non-EMU European manufacturing PMIs were disappointing.  The UK’s fell to 51.4 from 51.9.  This is a two-year low.  The average in Q1 was 53.7.  The average in Q2 is 51.7.  The manufacturing sector is small, and the service sector update is important, but the market may have been jumping the gun with talk of a November hike.
  • Separately, Norway and Sweden also reported disappointing PMIs.  Norway’s slumped to 44.0 from 46.5.  This is a six-year low.  Although the central bank may not put as much emphasis on this report as it does its own regional survey, another rate cut seems likely.  Sweden’s Riksbank meets tomorrow and it will not like the fall in the manufacturing PMI to 52.8 from 54.8.  It is the low for the year and orders fell to eight-month lows.  There is more talk of a small rate cut and a possible extension in the bond purchase program.
  • Korea’s trade balance rose to another record high in June, though both imports and exports fell.  Exports have been contracting for six months, falling -1.8%, while imports contracted by -13.6%.  June CPI was flat m/m, slightly lower than expected, equivalent to a 0.7% y/y increase.  Korea reports May current account data Thursday.  The external accounts continue to improve, though driven mostly by lower imports, while the sluggish economy is keeping price pressures down.  BOK is likely to maintain a dovish bias in H2.
  • The US reports a slew of data today.  The ADP employment estimate is for 218k private sector job growth.  The ADP has underestimated the BLS figure in five of the past seven months.  The market also puts emphasis on the ISM manufacturing report.  Chicago’s disappointed yesterday, suggesting downside risk with today’s national report.  The market expects a small gain to 53.2 from 52.8.  Although the markets typically do not respond to it, we suggest the auto sales data is also important.  After a heady 17.7 mln unit pace in May, a still strong 17.2 mln unit selling pace is expected in June.  This speaks to the ongoing strength of US durable goods purchases.
  • Brazil also reports June trade later today.  Exports are seen -5% y/y while imports are seen -13.5% y/y.  Brazil is grappling with high inflation and slow growth, and the central bank has decided to focus on inflation, but at the expense of the fiscal and growth outlook, which remain poor.  Last night, the Senate passed a measure boosting pay for the judiciary over the next four years, continuing a string of unhelpful legislation.  Rousseff will reportedly veto it, but we continue to think a downgrade to junk is likely in H2.