With Greece seemingly on the brink of an exit from the Eurozone, a marathon negotiation session over the weekend saw leaders arrive on principal terms to start the process of talks for a third bailout package. What seemed highly unlikely after last weekend’s ‘No’ vote has indeed materialized, with the Greek government capitulating to most of European leaders demands, and terms within a package that appear to be less favourable than the bailout package that was rejected at last week’s referendum. The acceptance of the deal terms that will have to be passed into law by the Greek parliament by July 15thor 22nd, depending on the specific term, will likely lead to a prolonged domestic political crisis as the government’s parliamentary majority will be called into question. Some of the more important concessions Greece made in exchange for continued financial support from the Eurozone in the amount of €86bln was setting up a €50bln fund to privatize government assets to help pay down debts and recapitalize the banking sector, sweeping pension reforms that either increase retirement age and/or cutting disbursements, an overhaul of the tax system which includes an increase in the VAT, along with Greece accepting the IMF as a partner in the new bailout program. The good news is that the agreement in principal allows the negotiations to continue and the ECB will likely keep the ELA ceiling for Greek banks stable, if not put some small raises in place to re-open the banking system.
While there are still many landmines that riddle the political road ahead until the ESM bailout process can be completed, the important progress has led to a strong performance in European equities with bourses firmly in the green by midday. After a brief knee-jerk higher when reports on the agreement crossed the wires, the earlier strength in the euro has been faded, with the common currency off nearly 1% ahead of the North American open. The rationale for the downward pressure on the euro is that some semblance of a Greek agreement allows the re-emergence of the euro carry-trade, utilizing negative rates to borrow euro for use in higher-yielding investment opportunities. In addition, stabilization in Europe allows focus to shift back to Yellen and the Fed lift-off time frame, with a successful bailout negotiation alleviate some of the concern Yellen faces with raising rates when the international situation isn’t solid.
As we get set for the North American open, the lack of tier-one economic data has market participants digesting the Greek headlines over the weekend, and driving price action accordingly. S&P futures are telegraphing there will be a positive open as the bell rings on Wall Street, with the optimistic sentiment putting pressure on traditional safe-haven asset classes like the Japanese yen. The hydrocarbon market is under pressure to start the new trading week, with some speculation that an energy agreement with Iran could be struck before the end of the week. The potential for an increase in supply hitting the global market has crude trading with an offered tone, as front-month WTI prints at sub $52. The combination of lower oil prices and a buoyant USD has stymied the loonie from making any outside gains in the wake of last week’s employment report, with all eyes squarely focused on this week’s Bank of Canada monetary policy decision. Overnight index swaps have scaled back the odds of a rate cut at this week’s policy meeting to just 33% after Friday’s job numbers, as the labour market continues to be at odds with GDP data. We feel it is too early to justify another rate cut from the BoC, yet acknowledge both the fact that January’s cut took markets completely by surprise, and the fact that any mention of a further delay in the Canadian economy returning to full capacity could foreshadow an additional rate cut by either September or December of 2015.
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