Beginning of the end for Greece

Week Commencing Monday 29th June 2015

This Week in Brief

In the UK we have the usual PMI releases, with all three indicators expected to see some modest expansion. Services is by far the most important and is set for a near 1 point expansion, giving Sterling some potential continued upside. Euro issues however may weigh on Cable prices, especially given the expect capital flight to the greenback should the referendum in Greece signal a exit.

In the US we have the all-important non-farm figures this week, with the expectation set to see unemployment levels continue to fall to 5.4 percent. USD should benefit from increase EUR weariness, and EUR/USD could be poised to return to the 1.06’s by Friday.

In Europe all eyes continue to focus on Greece where the newly announced referendum has put Greece closer than ever to an GREXIT. This is by far the most important geo-political and economic event of the week and we expect significant swings in Euro crosses as news develops.  

Overriding Market Themes

Given the developments in Greece over the weekend, this story has not overshadowed other economic issues and therefore is worth a special place in today’s report. Greek banks have now initiated a play to restrict access to their customers for six business days starting Monday, and impose strict limits on ATM withdrawals amid rising global concerns about the nation’s economic future. Sunday’s decision by the government to declare a bank holiday was a signal that Greece’s five-year battle to stay in the euro may well be coming to an end. The negotiations over Greece’s future within Europe have been painful, and dragged on for months. The disagreements surround the extent of the severe reforms that must be implemented to continue to receive the rescue funds the keep the county solvent.

The decision to close the banks came after the European Central Bank announced on Sunday that it would not enlarge an emergency loan program that has been a kept the Greek banking system liquid in recent weeks. This means that there is a 60 EUR daily withdrawal limit and Greeks cannot move money internationally. The decision to close the banks could help them preserve their vital remaining capital levels. That said, it also remains possible that whenever the banks reopen, their deposits would no longer be denominated in euros, but rather another currency whose value would devalue sharply almost immediately.

We believe the chances of a Greek exit from the Eurozone is now around 85 percent, and given that no nation has ever left the 19 member common currency, the mechanics of a Greek exit are deeply unclear. However, Eurozone and EU member states are considerably better prepared for a Greek exit now than they were in 2011 when the possibility first arose. Indeed, economically for the zone it could be a blessing in disguise, reducing the risk of further contagion and strengthening ties between member states (on the assumption that no other state wants to experience the pain Greece will!).

GBP This Week

UK rate assumptions have been stepped up to about a 80 percent chance of a 25 basis point hike in March 2016. With this in mind, we have seen a circa 4 percent jump in Sterlings value over the last few weeks, and the trend may well be set to continue. This change in rhetoric has been reflected in the greater-than-expected hawkishness during speeches from Ian McCafferty, Kristin Forbes and Martin Weale this month. This expectation has been compounded by the large pickup in April’s average weekly earnings to 2.7 percent year on year. All things being equal, Sterling strength could be here to stay.

In terms of data, we have the usual beginning of the month flurry of PMI releases. We start with the final reading of Q1 GDP on Tuesday, which is expected to be revised lower to 2.4 percent along with the larger than expected Q1 current account deficit. We then shift our focus to Manufacturing PMI which is likely to have picked up from the previous month, posting a 52.6 while Construction on Wednesday should also see a modest uptick to 56.6. Finally, the all-important Services PMI should see further growth in the index from 56.5 to 57.4.

USD This Week

Data wise, we are looking for the non-farm payrolls figure for June to see a creation of 250k jobs, compared to the market consensus of 227k. Importantly, this would push down the rate of unemployment by 1 percentage point to 5.4 percent. Also, given its importance to the Fed markets should also concentrate on average earnings, with a year on year increase of 2.3 percent expected.

With the above in mind, and taking into account risk flight surrounding the Greek issue, we believe that the USD should continue to be supported this week, especially against the Euro.

EUR This Week

The Euro will without question be caught in the political free-for-all surrounding Greece, and with the risks so high we expect a week of unprecedented volatility. Outside the Greek issue, the minutes from the Governing Council will likely to the key focus, with a heavy focus on Greece and maintaining a steady monetary policy. It will also be interesting to see whether Draghi shares the view that markets should get used to higher asset price volatility, given the recent hyper swings we have seen.

There are some other interesting releases potentially of note, however with Greece being such a big issue we believe that markets will solely focus on this issue for the week. Let us hope there is a EUR to comment on next week hey!   

29 June 2015


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