D-Day for Greece ... brace yourself for the ride!

Week Commencing Monday 15th June 2015

This Week in Brief

In the UK all eyes will be on the MPC minutes this week. Although no change in stance is expected we will be watching to see if the traditional hawks “pipe up” and suggest rate hikes be brought forward.

In Europe the impending Greek debt crisis continue to dominate with European finance ministers meeting on Thursday and Friday. This is pretty much last chance saloon for Greece and failure to reach an agreement this week puts the country perilously close to a default and ultimate European exit.

In the US, as with the UK, all eyes will be on the FOMC minutes. Markets will be looking to find any further hawkish rhetoric from the FOMC that confirms the current expectation of a September rate hike.  

Overriding Market Themes

After nearly five months in power, the Greek Prime Minister, Alexis Tsipras has come to a crossroads. He either accepts the somewhat draconian terms laid forth by the troika that ensures Greece remains within the Euro, or he goes it alone on the international stage and furfils his anti-austerity vision! Thursday’s meeting of Eurozone finance ministers is expected to be the last chance to strike a deal before Athens bailout programs expire on 30th June, so it looks like an end to this saga is nigh! Last week the mood became more sombre as it emerged that European politicians, for the first time, had debated the possibility of Athens defaulting. The revelation also came amid new reports that Angela Merkel is now resigned to letting Greece leave, and her government are in the process of planning contingencies. In terms of deals, EU sources are adamant that the Greek government’s proposed measures still run too close to the “red lines” that Tsipras has refused to cross, specifically in terms of pension cuts and labour deregulation. Indeed, this robust defence of what Greeks believe are their rights have played well with a population both tired and humiliated by the crisis, with support for his party at the highest on record. Either way, what happens next will likely dictate Greece’s future for the century, and in many ways the direction of the European integration project. The stakes could not be higher, and let’s all be thankful that we are not in Greece at the moment!

In more European focused news, S&P have cut the UK’s economic outlook from Stable to Negative on the back on preserved “Brexit” fears. As Greece hangs perilously close to its own “Grexit”, markets have started to wonder about the potential impact of the UK leaving the single market. Now, it is important to say that with the referendum scheduled to take place in 2017, the impact on markets is likely to be minimal, at this stage. When questioned on the downgrade, the credit rating agency also stated that they were concerned that a lack of political consensus could affect future economic policy, a swipe at the slim and potential fragile majority the Conservative government are currently sporting. S&P are in fact the only agency to still give the UK a top rating of AAA, because of its view that the UK economy is sufficiently diverse and flexible. The two other credit agencies, Moody’s and Fitch both downgraded the UK in 2013 to AA+ (the second best rating!) over worried about its economic growth and the country’s ability to repay government debt.    

GBP This Week

This week’s highlight for the UK is likely to be the June Bank of England MPC minutes, where discussion is likely to be centred on the poor growth start to the year and consequently the lack of appetite for rate hikes. There may well be some surprises from the hawks however, with members such as Ian McCafferty speaking last week about how the time for extraordinary policy may be drawing to a close.

On the data front, we forecast CPI inflation to increase 0.3 percent on the year, while Wednesdays Labour report should see unemployment remain unchanged at 5.5%. Finally, retail sales for May are expected to disappoint, growing 4.1 percent year on year after the 4.7 percent figure released in April. All in all, a mixed bag for Sterling this week, however with continued and escalating issues in Europe we expect some further traction against the Euro.

USD This Week

We start the US week with the FOMC meeting on Wednesday, where markets will likely focus on any change in general sentiment surrounding the possible September rate hike. Moving to the data, we expect headline CPI inflation to remain around 0 percent for the year, while core inflation should remain roughly placed around 1.7 percent. We also expect a slightly below average print in the housing space, with housing starts expected to be soft. Industrial production finishes the week with a slightly lower print of 0.1 percent on the month expected.

This should be a decent week for the US Dollar, with most movement surrounding the FOMC on Wednesday. Any rhetoric which further enhances the view that rate hikes are to be expected in the near term will strengthen the greenback across the board.

EUR This Week

As noted in this week’s events, the Greek debt situation will dominate markets this week, with the EU Finance ministers meeting on Thursday and Friday to discuss. On the data front however, things are a little light! We start with Euroarea headline and core inflation, which is expected to be confirmed at 0.3 percent and 0.9 percent for the year respectively. Also, the ECB is scheduled to carry out its fourth TLTRO operation on Thursday. Given the high participation in March’s operation, the markets will likely watch this closely, with EUR 80 billion expected to be taken up. 

15 June 2015


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