The results are in from Greece’s Sunday referendum, and the answer is a resounding ‘No’ to austerity from the Greek people. The Greek citizens went to the polls over the weekend to decide whether the country should accept the terms offered by European creditors in order to access a new bailout deal. Pre-vote polls showed mixed sentiment towards the vote, but on the day the votes fell strongly one way – with the No vote receiving 61.31% of the vote, and the Yes vote receiving 38.69%.
The market gapped lower across the board – the volatility was less than a lot expected, though Euro gapped lower by over a cent against the US Dollar and over two cents lower against the Japanese Yen. The DAX fell sharply on the news, opening lower by 400 points on the widespread pessimism and safe havens were heavily bid at the open. Once the initial news spike was over, however, there was a bounce back and most currencies have now retraced their falls from the weekend.
With Greece rejecting the bailout, what happens next is still very much up in the air. The Greek people do not necessarily want to leave the Euro, but defaulting on obligations is doing little to spur healthy relationships with its creditor partners. The Greek government is most likely hoping that a new deal is offered to them in order to ensure the crisis does not escalate or contagion begin with other Euro partners.
Tspiras will want to return to negotiations – however he has indicated that debt relief could be a part of any future deal with creditors. With Greece already “in arrears” – meaning it has essentially defaulted on loans from the IMF – it is only a matter of time before the next payment falls due that cannot be paid. In the meantime, the Greek banking system is on thin ice, and any resolution in Greece will likely require a return to liquidity assistance from the ECB; should no deal be possible, it isn’t yet clear that the ECB will provide this – leaving the financial sector in great doubt.
While Greece will continue to headline proceedings this week, there are other hotspots of important news. The RBA announces its Cash Rate on Tuesday, at 07:30 server time – economists are expecting no change and the rate to hold at 2.00% at this meeting, but given the threat of Greece the statement may provide comment about contingencies if that situation were to get out of hand – including further rate cuts. The Australian data is also continued on Thursday, with the Employment Change and Unemployment to be announced at 04:30 server time – expected +100 jobs and 6.1% Unemployment respectively.
The FOMC Minutes on Wednesday are also likely to be very important. The Federal Reserve is really coming to the point where it can begin discussing interest rate increases in earnest. While the Fed did not raise rates at the previous meeting, the minutes provide important insight in to how close they came, sentiment within the committee, and fears in the domestic and world economy. The minutes are released at 21:00 server time and often precipitate increased volatility.
The situation in Greece has escalated over the weekend. Many assumed that a deal would simply be reached between the Greek government and creditors before the new week – however Prime Minister Tsipras’ decision to call a referendum on the proposed bailout deal has thrown markets in to turmoil on Friday night.
The Euro gapped lower by over a cent on the market open today, touching below 1.1000 in early trading. The flight from the Euro affected currencies across the board, with Yen pairs especially affected due to the flight to safety of the Yen – EUR/JPY fell several hundred pips by the time trading resumed today. Stock markets reeled on the news, with most markets in Asia down by 2% or more including the Nikkei and ASX 200.
The Eurozone decided not to offer any extension on the bailout offer beyond the Tuesday deadline. Greek parliament approved the referendum plans on Saturday, to take place on July 5th – after the expiry of the current bailout, and putting Greece at an almost certainty of technical default when its 1.6 billion Euro payment to the IMF comes due on Tuesday. The ECB chose not to backstop the Greek banking system with emergency funding or liquidity. Greek banks are running short on cash as concerned citizens look to withdraw their remaining funds, with long lines commonplace at ATM’s.
Because of the standoff in negotiations, and the swift timeline before Greece is in default, Tuesday should be a day to keep a watch on the news. Not only will Greece need to find a way to pay the IMF, but the Eurogroup will have another meeting – which could add to the volatility. Should no leeway be given to Greece – and it fail to make payment – many outcomes come in to play, including Greece exiting the Euro.
To pour fuel on a volatile week, this Thursday is also Non-Farm Payrolls day– which means the volatility can be expected right through to Thursday. Economists are expecting a continued steady jobs recovery in the week’s data. Analysts expect the Unemployment Rate to fall to 5.4%, and for the headline jobs number to be an addition of 231,000 employed people. With the turmoil in Greece, a strong jobs number could help push the US dollar to some new found strength. The announcement comes at 15:30 server time on Thursday.
Greek concerns continue to dominate the headlines leading in to this trading week, after the ailing country and creditors failed to come to a deal on extending Greece’s bailout on Thursday. Greece currently needs access to emergency funds to continue making payments and avoid debt default and a potential exit from the Euro; such a release of funds is conditional on Greece coming to the negotiations with a credible action plan on how to reform the failed economy. The ECB provided 1.75 billion Euros in emergency loans to Greece on Friday, to lessen the panic.
The Greek story will play out through the week – with those close to the discussions growing pessimistic that the situation is unworkable. Today the Euro finance ministers will meet for another round of emergency meetings, with rumours that Greece will try and push a deal through to end the crisis and standoff. Should no deal be made, Greece will likely be plagued by a crisis of confidence and further outflows from the banking system. The next chance for an agreement would be expected to come at Thursday’s (June 25) EU summit – which could truly be a last ditch effort to come to an arrangement. Should this fail, the Greek bailout will expire at June 30 – and after that there are a number of possible outcomes including default, restructuring or leaving the Euro entirely. This will be the story to watch this week.
In other news, US Final GDP will be an important release on Wednesday (15:30 server time) – as economists are now expecting a slight improvement in the growth figure after a woeful second estimate of -0.7%. Analysts now expect the US economy to have contracted at a rate of -0.2% in Q1 this year. This is expected to be backed up in Tuesday’s Durable Goods release, also at 15:30 server time, where forecasts are for an improvement in the month on month figures to 0.6% for the Core figure and -0.6% for Non-Core release.
The FOMC Statement at 21:00 server time today should be the headline event for this week – barring a sudden turn for the worse in Greek debt negotiations – with the reality of rising US interest rates drawing ever closer. If the Federal Reserve is to begin raising interest rates later in the year, as the market expects, then it will need to signal this intention beforehand to prepare market participants. There is a chance this could begin as early as today’s meeting, owing to the accompanying Press Conference and release of economic projections.
The market is still pricing the chance of a June rate hike at nearly 0% for today’s release, however that does not necessarily mean a lack of volatility should be expected. The Fed’s forward guidance is of more importance at this meeting, as it is quite possible that Yellen will signal a firmer timeframe on policy tightening ahead of an expected move at some point between September and December.
The flip side to this is a scenario where the Fed downgrades expectations for the economy and inflation, and plays down talk of raising interest rates this year. If this were to occur, Yellen would be indicating that the downturn in Q1 of this year was likely to be prolonged rather than transitory. This is not a widely expected outcome, as Yellen has said recently that she still believes the weather related Q1 weakness will not continue to be a factor, and that statistical noise may also explain part of it.
This FOMC statement brings an update on the Fed’s economic projections. Growth has been particularly weak in Q1 this year – weaker than estimates had suggested at just -0.7%. Concerns of this lasting longer than expected may result in an adjustment downwards of the Fed’s growth expectations, which could confuse any messages about rate increases and the market reaction – though with energy prices recovering strongly this could easily balance out the weakness from Q1. Market estimates do not place much chance of a rate increase until September at the earliest, and not confidently so until the October meeting – where probability currently sits at just over 50% – so for now all eyes will be on the statement wording rather than an interest rate adjustment itself. The Press Conference at 21:30 server time will also be a source of market disruption as Yellen explains any changes to the statement.
The Euro gapped lower at the open this week on pessimism over disintegrating Greek negotiations. Discussions between Greece and her creditors failed to come to a satisfactory outcome on Sunday, putting Greece back at risk of default on its debt obligations. The lack of a resolution means that the Eurogroup meetings on June 18th will be perhaps another ‘last chance’ for a deal that would see the Greek bailout program extended. Should a deal not be in play on Thursday, there is a very real chance Greece could exit the Euro and default on its obligations – sending shockwaves through Europe. Greek yields remain near recent highs and the Euro is down over half a cent from last week.
The FOMC statement will be the second major focus this week, with the reality of rising US interest rates drawing ever closer – turning from a ‘what-if’ to a question of when. The market is still pricing the chance of a June rate hike as essentially 0% when the FOMC statement is released on Wednesday the 17th of June, however that does not necessarily mean a lack of volatility. The Fed’s forward guidance is of more importance at this meeting, as it is quite possible that Yellen will signal a firmer timeframe on policy tightening.
This FOMC statement also brings an update on the Fed’s economic projections. Growth has been particularly weak in Q1 this year – weaker than estimates had suggested, yet still considered a temporary setback. This may result in an adjustment downwards of the Fed’s growth expectations, which could confuse any messages about rate increases, though with energy prices recovering strongly this could balance out the weakness from Q1. Market estimates do not place much chance of a rate increase until September at the earliest, and not confidently so until the October meeting – where probability currently sits at just over 50%.
Thursday also sees the release of New Zealand GDP and the Swiss National Bank’s Monetary Policy Assessment. The New Zealand GDP will be interesting, given the sudden downturn in expectations there that led the RBNZ to cut interest rates last week. The SNB policy assessment will be watched closely purely due to the fear the institution evokes following its January surprise of removing the exchange rate cap. The SNB is expected to hold rates steady at -0.75%, but traders should be wary for any eventuality.
The week is capped off with the Bank of Japan’s Policy Statement and Press Conference on Friday. The BoJ has been happy to keep policy steady and accommodative, however recent data has not indicated that the initial Abenomics euphoria and bump in the inflation rate due to the Sales Tax increase have not resulted in lasting inflation. The Inflation and Core Inflation figures sit at just 0.6% and 0.3% respectively at latest reading – far from a 2% goal for the near future. If the bank is considering any policy adjustments, the Press Conference will be a likely medium for forward guidance.
Tonight’s Non-Farm Payrolls figure out of the US will be crucial for giving the US dollar some direction after being range bound against majors like EUR, AUD and GBP for several months. Early in the year, bets were front loaded on a swift and sure tightening in US monetary policy – however, expectations have been tempered recently as the strong US dollar and crumbling commodity complex saw weak economic data through the first quarter. Recent US data has been weak, but expectations are for this to be a temporary setback:
- Last month’s Retail Sales were much weaker than expected at 0.1% and 0% for the Core and Non-Core figures respectively – expectations were for an improvement of 0.4% and 0.3%.
- GDP has been very weak at -0.7% for Q1, however this was a known factor and has not acted to further shock markets to a great extent.
Analysts are not betting on any major deviation from the trend today:
- ADP Non-Farm Employment data on Wednesday indicated a marginally better than expected result of 201,000 – up from 165,000 previously. The ADP figure is not always a great indication of month to month figures, but the trend is usually in line with NFP.
- For the Non-Farm Employment figure, analysts are expecting something of a goldilocks figure of 222,000 – essentially unchanged from 223,000 last month and keeping in line with a trend of mild recovery but not enough to stir calls for an earlier rate rise or raise fears of wage driven inflation.
- With the tepid growth in job numbers, the unemployment rate is expected to remain steady at 5.4% – the lowest rate since the GFC.
The figure will depend on any data surprise against this middle-of-the-road expectation, as well as any revisions to previous months. The release is scheduled for 15:30 server time.
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It’s a big week for data, as is usually the case for the first week of the month. Headline events will be the RBA Rate Statement on Tuesday, the ECB Press Conference on Wednesday and Non-Farm Payrolls on Friday.
The RBA is expected to hold rates at 2.00%, after cutting rates by 25 basis points last month – with the RBA allowing some time for previous rate cuts to filter through the economy. The ECB is also expected to hold steady, as inflation and growth in the Euro Area is seen to be stabilising
The usual exception would be Greece, with talk of an exit from the Euro rising again recently it is likely that Draghi will take questions on the exit scenario again at the Press Conference, which is often a source of great volatility. Despite early setbacks this year, US employment is expected to continue adding jobs in line with trend estimates and the unemployment rate to remain steady at 5.4%.
Australian Building Approvals m/m: Expected -1.7%, 04:30 Server Time
HSBC Chinese Final Manufacturing PMI: Expected 49.1, 04:45 Server Time
UK Manufacturing PMI: Expected 52.7, 11:30 Server Time
US ISM Manufacturing PMI: Expected 51.5, 17:00 Server Time
RBA Rate Statement: Expected 2.00%, 07:30 Server Time
UK Construction PMI: Expected 55.1, 11:30 Server Time
Australian GDP q/q: Expected 0.6%, 04:30 Server Time
UK Services PMI: Expected 59.5, 11:30 Server Time
ECB Rate Decision & Press Conference: No rate change expected, 14:45 – 15:30 Server Time
US ISM Non-Manufacturing PMI: Expected 57.2, 17:00 Server Time
Australian Retail Sales m/m: Expected 0.3%, 04:30 Server Time
UK Official Bank Rate: Expected 0.50%, 14:00 Server Time
US Non-Farm Employment Change: Expected +226,000 jobs, 15:30 Server Time
US Unemployment Rate: Expected 5.4%, 15:30 Server Time
Canadian Employment Change: Expected +10,200 jobs, 15:30 Server Time
Tonight will be a big night for North American growth, with both the US and Canada reporting their growth figures for the quarter and month respectively. Both releases come at 15:30 server time, meaning USD and CAD pairs can be expected to show high volatility at this time. The US data, as always, will grab the headlines and is more prominent, owing to its less frequent release schedule. From the US data, economists are expecting a moderate contraction in the economy:
- The Advance GDP figure for Q1 revealed Real GDP growth of 0.2% – still positive but very weak owing to a number of factors.
- The fall in energy prices, weak inflation and the strengthening US dollar are expected to cause a further fall in the Q1 growth rate.
- Analysts forecast growth to fall from 0.2% in the Advance figure to just -0.8% in the Preliminary figure today.
For the Canadian data, the impact is not likely to be as major as the US release – but with the BoC holding interest rates again this week it will be insightful for the future direction on monetary policy.
- Month on month GDP is expected to bounce back to 0.2%, after 0% last month. This will complete the Q1 GDP figure for Canada as well.
- Growth is expected to remain flow in the first half of the year due to the Oil price collapse, however given the volatile nature of energy prices – this could result in stronger growth in the back end of the year.
The theme of early 2015 appears to be weakness in growth and inflation, with expectations that both will begin to bounce back later in the year – potentially along with US interest
The Bank of Canada meets today to decide on interest rates and monetary policy, which will be announced in its Rate Statement at 17:00 server time. The Bank of Canada has held its overnight rate at 0.75% since January, when it cut from 1% amidst a rapid Oil price fall. As oil prices have stabilised somewhat since the start of the year, and the fear of a further collapse in inflation has abated – the BoC is no longer expected to keep cutting rates to prop up the Canadian economy. As such, analysts are expecting a brighter outlook:
- The Canadian Dollar has been falling strongly for the last few weeks, with USDCAD rising from 1.1920 to 1.2445. This should support exports and the economy, and be seen in a positive light.
- Oil prices have rebounded dramatically, from lows of around $45 USD/Barrel to around $60 USD currently; this is constructive for both the Canadian economy – which is heavily tied to energy markets – and inflation in general, though CPI is still not showing much strength.
- The Unemployment Rate fell from 6.9% to 6.8%, though this was on the back of a large fall in total employed of -19,700 – a mixed result.
With economic conditions appearing to have stabilised for the moment, analysts are currently not expecting a change at this meeting. Instead much of the market movement is likely to come from how the bank views the economy and inflation rebounding.← Older posts