"Grexit" becoming more and more likely by the minute!

Week Commencing Monday 20th April 2015


This Week in Brief


In the UK we will be watching the BoE minutes on Wednesday for further clues that policy is likely to remain unchanged until next year. We also are looking for retail sales to drop marginally on the month to 0.4 percent.


In the US we expect Durable Goods to decline 0.3 on the month versus the -0.6 decline last month. New Home Sales are also expected to increase given the dismal start to the year the property market saw.


In Europe fears remain around a Greek default and/or potential “Grexit”, and this remains the main drive of Euro volatility. Eurozone Flash PMI’s and German ZEW are likely to be the only data points of note, with a generally positive outlook for all of these indicators. 


Overriding Market Themes


We start this week with more positive news from the UK as Christine Lagarde praised the UK government’s handling of the economic crisis. Speaking at a press conference alongside the George Osborne, Lagarde delivered a speech flattering the coalition’s right balance between spending and taxation.  She did however stop short of wading in on the current election jitters, citing the IMF’s gloomier view of the UK’s prospects over the next five years. She reiterated that the next governments would find it considerably harder to bring down the deficit, and that household debts continued to be a concern. More globally, she said that growth remained vulnerable to further economic shocks owing to the skewed nature of the recovery from the financial crises. They did however leave their global growth forecast unchanged at 3.5 percent for 2015, and increased their 2016 growth target by 0.1 percent to 3.8 percent.


Ironically, at the meeting with the Chancellor was German Finance Minister Wolfgang Schaeuble, who is struggling with his own gargantuan problems at the moment, namely a small state in the periphery of Europe called Greece! Indeed, credit rating agency S&P downgraded Greece’s credit rating one level last week, warning that it may not be able to meet its debt obligations in the coming months. It comes after Greek Prime Minister Alexis Tsipras travelled to Moscow to meet with President Vladimir Putin which intensified rumours that Greece was looking outside of the EU for finance. Indeed, things have got so tense in the corridors of Brussels that even the coolheaded Mario Draghi appears to be getting worried, having warned that the negotiations around Greece’s EUR 240 billion bailout program are “urgent”. He also mentioned that a default by the country would push the region into “uncharted territory”. It seems that at least for the short term, it will remain fun and games in Euroland!


Over in China, the central bank has reduced the bank reserve requirement ratio by 1 percent in an effort to stimulate more lending into the economy. Weighed down by a property bubble explosion, factory overcapacity and soring local debt, growth is expected to slow to a quarter century low of around 7 percent this year from 7.4 percent in 2014, even with expected additional stimulus measures. Infact, the Chinese government is co concerned about the slowdown of the economy that the central bank has also reduced rates twice since November in a bid to lower borrowing costs.


GBP This Week


With the high degree of uncertainty continuing to surround the election, coupled with increasing division amongst Bank of England MPC members, should lead to an interesting week ahead! We start the week with the release of the BoE April minute on Wednesday, where we see growing risks that policy will be kept unchanged beyond this year. Especially given trade weighted currency strength in the first quarter and low energy prices continue to weigh on inflation.


We will also be watching Thursday’s retail sales figures, which should fall in line with last months by growing by 0.4 percent. This should not surprise markets, especially given that spring tends to be a good time for consumer clothing purchases. Either way, the release will struggle to keep the Pound upbeat versus a less than bullish BoE.


Apart from the above, focus continues to be on the election, and with the latest polls continuing to suggest no clear winner, we expect markets to remain exceptionally volatile.


USD This Week


In the US we forecast new home sales to have risen by 1.4 percent to 547,000 in March, pointing to a normalization of the market since the bad weather over winter effectively killed the market. Furthermore, durable goods orders are expected to have declined by 0.3 percent on the month following the -0.6 percent decline in February.


Generally, things are looking much better in the US than almost anywhere versus their European peers. Indeed, the latest Fed Beige book has reported a rebound in activity from February as the economy recovered from the harsh winter weather. This in spite of the headwinds created by a stronger USD and lower energy investment. The USD is likely to therefore remain the “darling child” of the currency markets therefore, and further gains are likely as we draw closer to the end of the month.


EUR This Week


Market sentiment towards Greece remains extremely fragile and we are likely to see further EUR weakness as we draw closer to the potential “default” date. This is without doubt the single most important driver of the EUR currently, and any further developments in this situation will dictate EUR direction for the week/month.


Elsewhere in Europe, German ZEW and IFO coupled with Eurozone flash PMI’s are the highlight of the week. In general, most of the releases are likely to be reasonably bullish, indicating continued recovery in the region. Any positive impact these releases may have on the EUR however will be negated by the current Greek uncertainty and the ECB’s commitment to continue with QE until late next year. 

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