Going into a long weekend, Ms. USA (AKA the US Dollar) was mainly dragged by her forex counterparts on the forex dance floor and showed major moves. Mr. Euro dropped significantly as the rumor mill started churning over what ‘opportunities’ there might be to deal with Greece over a long weekend in most of Europe. Mr. Euro moved down strongly against Ms. USA, as acknowledgements were made by Greece that it won’t be able to pay the IMF what it owes at the beginning of next month.
On top of this, German politician Wolfgang Schaeuble pondered, out loud, the prospect of Greece running a parallel currency to the euro while it sorts itself out and then reintegrating when/(if?) it has managed itself out of trouble. This revelation, from the staunchest advocates of European integration, was a lot to take in on a Friday afternoon. We’re not too sure how you run a parallel currency without the market believing it is an outright Grexit with no real route back to integration.
There is talk that we could see a deal done by the end of the week, but Greece and their creditors are apparently still miles apart in terms of what they want, so a deal might not mean a solution and instead could be the above, or some temporary refinancing to keep them afloat over the summer. We’ll wait and see.
Elsewhere in Europe; Spain had some local elections over the weekend, the outcome of which shows a big shift to the left. The outcome is seen as a good bellwether for general elections later this year, with more people voting for anti-austerity parties. The problem is that there isn’t one majority voice from the left, rather a lot of smaller independent parties. As such markets are fearful that post-election Spain is likely to be very disorderly whilst parties try and form a government. Yesterday the Spanish stock market fell more than 2% on these fears, despite their election not likely to take place until December.
In the UK, David Cameron told Jean Claude Juncker yesterday that Britain is ‘unhappy with the status-quo’. The pair are set to kick off a week of negotiations to try and find some middle ground as to what David Cameron sees as a fairer position for the UK within Europe. At the same time, France and Germany are working towards goals for tighter European integration and it is not quite clear if these goals will conflict with David Cameron’s.
Further afield, ‘war is inevitable’ between the US and China unless the US reins in its demands that China stop reclaiming land in the South China sea. This is from a Chinese state newspaper, who say that if the USA’s bottom line is that China must cease building artificial islands in a bid to increase its claims to the sea then conflict is the only outcome. There’s a link to a more detailed report here.
In Japan, stock market valuations last week reached the same dizzying heights. Shares across the Tokyo Stock Exchange are now cumulatively valued at 118% of the size of the entire Japanese economy and have continued to rise this week. Markets, as yet, seemingly unconcerned all the while Shinzo Abe is in power and printing cash, but if memories of a lost decade aren’t enough to put people off buying, what is?
Week Ahead
The final week of the month is here and we started off the week with bank holidays around the world. Going into this week, we’re fairly data light across the globe.Tuesday remains light on economic data moving into London session with most important releases being only out of the US. We have Core Durable Goods Orders at 1:30 PM GMT and Consumer Confidence at 3 PM. Wednesday is reserved for the G7 meeting all day long, attended by finance ministers and central bankers from 7 industrialized nations – Canada, Italy, France, Germany, Japan, the UK, and the US. The meetings are closed to the press but officials usually talk with reporters throughout the day, and a formal statement covering policy shifts and meeting objectives is usually released after the meetings have concluded. Both the comments and statement can create significant market volatility. On top of this, we have BOC Rate Statement at 3 PM GMT.
The main event in the UK will be any revisions to the first reading of GDP in the first quarter, released on Thursday. We’ll also see consumer confidence released overnight on Thursday/Friday, but we can’t see this being anything other than a good reading.
The lack of data probably means that there will be more focus on Greece as we get to the final few minutes of extra time. Any bad outcome is likely to play heavily into the hands of US Dollar and be very much to the detriment of global stock markets. A positive outcome (or the can kicked down the road) could mean another big push in equities.
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