The Global Markets Weekly – 7/13/15

Posted July 13, 2015 by rvillareal

In Greece, the Last Chance Saloon Never Closes[private]

In Greece, the last chance saloon never closes, as some observers have noted.  But there been two important developments.  First, the EU creditors (including Germany) have hinted that debt reduction is possible if a credible economic plan is presented.  While this is realization is long overdue, this admission opens up a whole new can of worms.  If Greece gets a special deal, a number of heavily indebted counties in Europe, not to mention the countries in the IMF much poorer than Greece, may ask for the same special treatment.  So bond holders may not be as rich as they think they are.

Second, the EU leadership worries more and more that keeping Greece in the Eurozone and letting them break the rules again may be ultimately more harmful for the euro than just kicking them out now.  There are a lot of moving parts in ongoing negotiations now that a new (and perhaps acceptable) plan is in hand.  The outcome is not certain but as long as both parties are talking, the ECB will not withdraw support keeping the Greek banks and economy still (barely) functioning.  If so, talks could drag on for some time, at least until the July 20 payment is due to the ECB.

While Greece is a tiny part of the global economy, China, however, is not.  Of more importance to global investors may be the potential spillovers from the sharp slide in Chinese stocks.  The Chinese government is trying to shore up prices in a market that has been quite volatile for 25 years.  And there are good fundamental reasons for steep price decline-stocks appear pricey and few investors are fully confident that GDP growth will stabilize at 7% or higher.  The direct impacts of the stock market drop may not be large since the stock market is not large by western standards and that stock ownership is not widely held.  But the indirect effects of damaged consumer confidence may be much larger and more harmful to China and the globe.

• U.S.:  In a busy week, investors are looking for a solid gain in retail sales (Tu) and some guidance from Fed chair Yellen at her Congressional testimony (Wed).  Yellen may repeat her recent mantra that a hike this year is possible but “data dependent.” This gives the Fed the luxury of waiting to the last minute to decide.
• Eurozone:  One way or another Greece has buckled, ie either/both economically and politically.  Even if a deal is crafted, it may only be the end of the latest act in this Greek saga rather being an end to the overall tragedy itself!   Meanwhile, the ECB Council meeting on Thursday has of course taken on a clearer profile given the pressures the central bank is facing in regard to Greece.
• UK:  While it may not attract as a high a profile as other economic data, it may still be the case that the most important data release this week will be the all-embracing BoE Credit Conditions Survey on Monday for Q2.  Even so, CPI data may show a fresh fall in the Y/Y rate.
• Japan:  The key item is the monthly Bank of Japan Monetary Policy Board meeting (Wed), which, while unlikely to bring a policy change, will bring a new round of member forecasts.
• Other central banks:  In Canada,  most are looking for no change at the BoC meeting (Wed).  However, recent weakness, especially in exports, has led to some talk that a rate cut is possible.
• Emerging Markets/Regions:  In China, a sideways continuation of the poor results reported in May is expected in June for exports, imports and industrial production, and a worsening for aggregate financing.  In addition investors wonder how much below 7% the actual Q2 GDP figure may be.

gmw_0710[/private]