Will we ever talk about anything other than Greece?

Week Commencing Monday 22nd June 2015

This Week in Brief

We have very little out from the UK this week and all eyes will continue to focus on the Greek bailout situation on the continent.

In Europe, Greece continues to dominate with EU leaders set to thrash out a final agreement on Monday evening. Apart from the talks, EU member state PMI’s and German IFO are all expected with a generally mixed bias expected.

In the US we have a quiet week with durable goods and the final revision of GDP expected to be released. Again, we expect a mixed message and the US Dollar to trade within its current range.

Overriding Market Themes

We start this week, like most weeks, with Greece! “Will this debacle even end” is one of the most often question we are asked, and finally it does seem that an end is in sight. What that end will be however, is a totally different matter! The race to save Greece from economic collapse has intensified as the country’s Prime Minister conducted a flurry of discreet negotiations before an EU summit on Monday that is expected to decide the country’s fate. This new package being proposed is the third such offering to creditors in so many weeks, and unless it contains some significant shifts in the Greek position is unlikely to be going the time of day. In case anyone needed any reminding, the president of the European council, Donald Tusk, warned the situation was dire. Either Tsipras’s anti-austerity government accepted painful reforms, reportedly at a cost of EUR 5bn, or it would go bust. Speculation is now rife that Greece’s creditors at the troika (the collection of EU, European Central Bank and IMF) would offer a six-month extension of the bailout programme, if agreement was reached. This would see an additional EUR 10bn worth of funds find its way into Greek government coffers and tide the country over during the summer period. This would also have the advantage of allowing Athens to “kick the can” for a further couple of months while it works its way through what its actual objectives are in terms of fiscal consolidation. Either way, it appears that we are drifting towards some form of resolution, either good or bad, for the nation. During a trip to Russia last week, Tsipras intimated that Athens would be prepared to forge other alliances if its relationship with Europe broke down. Political posturing or a sign of things to come, we will have to see.

Moving back to home soil, Strong income tax receipts pushed the British government’s borrowing levels to the lowest since 2007, in news which will continue to boost the Chancellors economic credibility. This adds to further signs indicating revenue growth could play a major role in the Treasury’s debt reduction plans. The budget deficit fell to GBP 10.1 billion from GBP 12.4 billion a year earlier, a smaller gap than economists had forecast. This comes just a few weeks before the Chancellor unveils his first conservative-led budget for two decades, where he is likely to commit future governments to run budget surpluses during normal economic times. This is not a moment too soon, as news figures suggest that total national debt in the UK has surpassed GBP 1.5 trillion (pushing the figure to just over 80 percent of gross domestic product). It is unlikely however that the good news will be enough to save the country’s last remaining triple A rating, given that S&P switches their outlook for the UK economy to negative from stable last week. Although this is mainly due to market uncertainty caused by the EU referendum, it goes some way to demonstrate the job at hand for the chancellor. The UK, relative to its peers, has recovered well and seems set to continue on a relatively strong course of economic growth. The journey however will not be smooth sailing!

GBP This Week

In the UK we have literally nothing to report this week, with the exception of Mark Carney’s panel contribution at the 2015 London conference on Inclusive Capitalism. This means that Sterling will trade on two continuing factors. Firstly, continued political uncertainty surrounding the EU referendum and upcoming summer budget, while secondly the continuing Greek situation in Europe. 

In terms of political uncertainty, given the EU referendum is scheduled in 2017 polling will play no part, it is more how the incumbent government approach it’s campaign. Should David Cameron whip his MP’s into supporting the “don’t leave” campaign it would give markets a certain level of assurance that all the main political parties are on-board. Should he however concede and allow MP’s a free vote, the situation becomes more convoluted.

Either way, GBP has performed well versus its peers of late, and seems set to continue this move in the absence of any economic data. Given Greece, we have the potential to see GBP/EUR push well above the 1.40 level, with the recent high of 1.4250 potential within the firing line.

USD This Week

We expect to see a US Dollar moving sideways this week, with very little in the way of important economic data on the horizon. We start on Tuesday with durable goods orders for May, where we expect to see a drop in the monthly headline figure of 2.5 percent, and an increase in the core figure of 0.7 percent. Later on in the week we have the final Q1 GDP figure which is expected to be revised up from -0.7 percent to -0.2 percent. Finally, Thursdays PCE index should come in slightly below consensus with a 0.3 percent increase on the month expected.

With last week’s cautious FOMC communication, the US Dollar is not going to benefit from its usual rate driven bullishness, and as such will trade on data this week. With this in mind, expect a leaning to more near term downside, potentially pushing GBP/USD up to the near 1.60’s once again and EUR/USD to the 1.15’s (assuming Greece don’t do anything stupid in the meantime!).

EUR This Week

As discussed above, the Euro remains heavily dependent on Greek news in terms of overall direction. In the wake of no progress made at last Thursday’s meeting, EU heads of state will meet on Monday in what is thought to be the “last chance saloon” to strike a deal and avert financial collapse for Greece. This will, without question, set direction for the week.

In terms of data, we are looking for Euro area flash PMI’s to edge down in June to 53.4 due to lower services confidence. Manufacturing on the other hand should continue to point north and inch up to 52.4 versus consensus of 52.2. The final release of note is German IFO which is likely to drop marginally on the month to 108.0 from 108.5, however this is still well above the 103.6 lows recorded late last year. 

23 June 2015


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