Greece capitulates, Attention Turns to the ECB

The Greek government has capitulated on nearly all of the European demands, seemingly averting an unceremonious exit from the monetary union.

  • The Greek government has capitulated on nearly all of the European demands, seemingly averting an unceremonious exit from the monetary union
  • The acceptance of the creditors’ demands is likely to precipitate a domestic political crisis that will lead to a change in government
  • The other main focus of investors has been the meltdown in Chinese shares and the aggressive policy response that led to a recovery
  • The Fed is also back in focus now
  • Besides the numerous Greek deadlines that have come and gone in recent weeks, we note that the deadline for an agreement with Iran has also been adjusted

Price action:  The net impact of a deal for Greece was a firmer dollar, a weaker euro, higher stocks, higher yields in core markets, and lower yields in the EU periphery.  The euro spiked to nearly $1.12 when the headlines broke but has since fallen to $1.1070.  The pound is outperforming, testing the $1.5560 level.  The dollar is pushing higher against the yen at ¥123.50.  Against EM, the dollar is mostly firmer, outperforming against MZN, RUB, and ZAR but down only against TRY and IDR.  Still, the moves have been generally modest.  The Shanghai Composite managed its third consecutive positive close, up 2.4%.  MSCI EM is also having its third straight up day, up nearly 1%.  The Nikkei gained 1.6%.  EuroStoxx is up 1.7% near midday, while US futures are pointing to a higher open.  Crude futures are down 1% on the day, approaching the lower end of the recent range.  Comments by US Secretary of State, Kerry, sounded optimistic again about a deal with Iran after the group came into an impasse regarding arms sales.  Core eurozone yields are up 3-4 bp, while those in the US are up 6 bp to around 2.46%, the highest since late June.

  • The Greek government has capitulated on nearly all of the European demands, seemingly averting an unceremonious exit from the monetary union.  Prime Minister Tsipras ultimately failed to deliver what he promised:  no austerity and staying in the monetary union.  The Greek parliament must now pass six reform bills that the recent referendum had appeared to reject.  The ECB will meet later today to make some decision on the Emergency Liquidity Assistance.  It is thought that as little as a EUR2 bln increase in ELA could re-open the banks Tuesday/Wednesday, though capital controls would remain in place.  While it might be tempting to wait for the Greek parliament to vote, it is not clear that the Greek banking system can survive until then (Wednesday).  Also, note that Greece has a rather small samurai bond maturity tomorrow, as well as Greek civil servant and pension fund payments to make on Wednesday.
  • Greece has been able to keep the government running by falling into arrears (not default) to its domestic service providers.  Moreover, the brief growth that Greece had posted in a couple of quarters last year seems to be a greater function of prices falling faster than output, rather than true greenshoots.  This all suggests that Greece’s economy is in even worse shape than it may appear.
  • The acceptance of the creditors’ demands is likely to precipitate a domestic political crisis that will lead to a change in government.  A technocratic government, led perhaps by the central bank governor, seems to be the most promising possibility, but new elections cannot be ruled out later this year.
  • At the same time, it appears to many that Germany overplayed its hand.  The willingness to accept a Greek exit is poisonous.  It means that EMU is simply a more rigid form of the older Exchange Rate Mechanism.  The bitterness and vindictiveness of the German stance are bound to create lasting scars within Europe.  Although it seems obvious that this will prevent greater integration, we are less sanguine.  A new bold initiative toward greater integration is possible precisely because of the fissure.
  • The other main focus of investors has been the meltdown in Chinese shares and the aggressive policy response that led to a recovery.  The Shanghai Composite rose 2.4%, and the Shenzhen Composite rose by a little more than 4%.  More companies unfroze trading in their shares, as the situation slowly normalizes.  This is a big week for Chinese economic data.  It began with the June trade figures.  Exports were up more than expected, and imports were not as poor as forecast.  Exports rose 2.8%.  The market expected a 1.0% increase after a 2.5% fall in May.  Imports fell 6.1%.  They had fallen 17.6% in May.  The consensus called for a 15.5% decline.  The net result was about a $10 bln smaller than expected trade surplus.  The $46.5 bln surplus follows a $59.5 bln surplus in May.  Tomorrow, lending data be released.  Seasonal considerations suggest strong lending.  On Wednesday, China reports industrial output, retail sales, and fixed investment, but the main focus will be on Q2 GDP.  It is expected to dip below 7%.
  • A third important issue for investors is the Federal Reserve.  Yellen spoke before the weekend.  In her plain speaking manner, she indicated that the FOMC was still on the path to hike rates once or twice this year.  She argued that while Greece and Chinese developments are important to monitor, monetary policy is driven more by domestic considerations.  Yellen repeated her suggestion that there might be preliminary signs of emerging wage pressure.  These general points will likely be the basis of Yellen’s testimony before Congress this week.
  • Indeed, EM remains caught in global crosscurrents that are mostly negative.  If risk off sentiment ebbs as Greek and Chinese tail risks fall, then that simply brings the focus back on the looming Fed lift-off.  We expect EM to remain under pressure in Q3.  Low commodity prices also seem likely to continue weighing on EM assets.
  • Besides the numerous Greek deadlines that have come and gone in recent weeks, we note that the deadline for an agreement with Iran has also been adjusted.  There is some speculation that an agreement could be struck over the next 48-72 hours.  The anticipated Iranian oil that would hit the global market (millions of barrels are thought to be in floating storage) is one of the factors weighing on oil prices.  The US rig count increased last week, for only the second time since December.  US output remains near record highs, and OPEC appears to have increased its production further above its quota.
  • India reports June CPI shortly and it is expected to rise 5.1% y/y vs. 5% in May.  May IP came in weaker than expected last week at 2.7% y/y.  Price pressures remain low even as the monsoon season unfolds, and so we expect the RBI to continue easing cautiously in H2.  The Indian weather bureau predicts that the June-September monsoon season this year will be 88% of the 50-year average, so there are upward risks to food inflation.