Greek relief starting to stall
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Greek relief starting to stall

Signs emerged on Friday that the Greek relief trade that had supported risk appetite in previous days was already running out of puff. S&P’s warning that Italy’s deficit reduction plan contained significant delivery risk, especially their claims regarding the combat of tax evasion, soured the euro’s mood and encouraged some traders to retreat to the sidelines. Commodities went into reverse as well, with Brent crude back under $110 at one stage.

Of particular interest recently is the sluggishness of the gold price, which fell back to $1,485 an ounce on Friday. Two weeks ago, the gold price was above $1,550. Indeed, the adverse price action in gold coincides with the heaviness of that other safe haven, the Swiss franc. The question is whether this softness in the traditional safe havens is just temporary, perhaps reflecting some profit-taking, or more permanent? The weakness is all the more intriguing given the enormity of still unresolved issues such as the European sovereign debt crisis and the US debt ceiling. July promises to be another interesting month for asset markets, especially currencies.

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EUR/GBP uptrend not yet driven by rate differentials. There has been very little  respite for sterling over recent trading sessions. On Thursday it was battered by month-end and quarter-end flows, and then on Friday suffered further after another soft manufacturing PMI outcome. Indeed, the latter is now close to contractionary territory below the 50 level (the June reading was a 21 month low at 51.3). The talk from Markit who publish the data was of weakening overseas orders, with the slowdown in government spending also having an impact. The hope was that the manufacturing sector, and particularly exports, would be able to make up for the anticipated softness in both government and household spending, but this latest release brings that more into doubt. The curious thing is that it has not been changing interest rate expectations that have been the main driver of EUR/GBP over the past month, the euro having gained over 4% against the pound despite the ongoing Greek saga. The difference between 2Y rates in the UK and eurozone were broadly steady over this time. Clearly, sterling was just not an attractive alternative to the euro during the risk aversion that characterised much (although not all) of last month. However, the ECB’s anticipated tightening this Thursday, together with likely further talk of more quantitative easing in the UK, could well see the policy divide become more pronounced in the coming weeks.

Swissie hit by much weaker manufacturing news. It appears that the exceptional strength of the currency is having a greater impact on the Swiss economy than expected. In June, the SVME PMI dropped sharply to 53.4, down from 59.2 previously. The combination of the strong appreciation of the currency and some weakening in global demand certainly weighed on this weaker PMI reading. The output component of the PMI collapsed by 14.5 points to 46.6 in June. In response, the Swissie is now threatening 0.85, while EUR/CHF is above 1.23. Suddenly, the Swiss franc is looking less indefatigable.

The Greek privatisation fairytale. A critical feature of the latest austerity package which has now been passed by the Greek parliament is a pledge to generate EUR50bn from the sale of state assets over the next four years. Frankly, given the stringent opposition of trade unions, politicians and the general public to privatisations, and the inefficiency that is rife within many of the supposed sale targets, achieving this objective looks incredibly challenging, and in all likelihood, extremely unrealistic. Unions are frightened that privatisation of utilities would result in massive job losses, a justifiable fear. Greek energy companies are not yet fully liberalised, which will weigh on their valuations quite substantially. In addition, the government seems determined to maintain management control of any utilities that are privatised which, to put it diplomatically, might just compromise any serious buying interest from the private sector. Moreover, the timetable implied in the privatisation agreement is much more rapid than Greece has ever managed to achieve. The problem is that many of the assets identified for sale need a great deal of work before they are in a fit state to be sold. Absent fundamental changes such as transparency, competition, reform to working practices and management control, the likelihood is that the majority of assets would be sold at fire-sale prices. Indeed, it would be remarkable if Greece got anywhere near this EUR50bn target by 2015. Prepare to be disappointed on Greece, again.

Geithner departure unlikely to assail the dollar. Speculation mounted in Washington last week that Treasury Secretary Geithner may step down after the debt ceiling impasse is resolved. Geithner is reportedly seeking a break after four intense years at the heart of the Administration’s response to the global financial crisis. One concern about his leaving is that the three other original members of President Obama’s economics team have also now stepped down from their posts, namely Council of Economic Advisers’ Chairman Christina Romer, National Economic Council Director Lawrence Summers and OMB Director Peter Orszag. Notwithstanding this high turnover of key economic personnel, Geithner’s departure would be unlikely to hurt the dollar too much.

Tighter policy seems to be working in China. Although the Chinese economy still appears to be humming along nicely, there has been some evidence in recent weeks that the policy tightening implemented this year is bearing some fruit. Last month, the PMI produced by the China Federation of Logistics and Purchasing fell to 50.9 from 52.0 previously, the lowest outcome since early 2009. Another survey conducted by HSBC showed that manufacturing output actually declined last month for the first time in a year. Manufacturing represents around one-half of China’s economy, and so a slowing here is quite critical. Separately, a report on house prices showed slower gains or even declines in eight of the ten largest cities in China. Policy officials would no doubt be encouraged by these developments, although it is still likely that they will need to tighten financial conditions further in order to contain inflation. In the last few weeks for instance, the PBOC have been more tolerant of currency appreciation, recognising that it can make a contribution to their goal of restraining inflation.


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