As the calendar closes in on the end of the month and the arithmetic conclusion of the first half of 2015, the Greek debt drama appears to be reaching some semblance of a conclusion given the large bundled payment that is due to the IMF in a week’s time. While on the surface the bullet repayment to the IMF is what many believe to be what is forcing Greece’s hand as part of the negotiation process with its group of creditors, the liquidity situation of the Greek banks is having just as, if not more, of a hand in what might lead to Syriza’s capitulation and extension of the current bailout terms. The assurance of continued liquidity assistance was provided by ECB chief Mario Draghi to Prime Minister Tsipras on Monday, though the condition was that Greece needs to be in an aid program. The acceleration of deposit flight from the Greek banking system as the threat of capital controls looms over the population has resulted in the ECB raising the Emergency Liquidity Assistance (ELA) ceiling three times in the past five days. With Greece running out of eligible collateral to pledge for ELA borrowing, Tsipras might be quickly forced to agree to an extension of the current bailout terms in exchange for the ECB keeping the Greek banking systems afloat and assuring depositors their capital is safe. Financial markets are skeptical that even a Tsipras capitulation would lead to a smooth outcome in the ongoing negotiations, as anecdotally it appears that the Greek leader is losing support within the party ranks from the more radical left-wingers that don’t want any concessions to what has already been purposed to the Troika. The potential for a referendum if Tsipras does try to pass a bailout extension through his party could lead to a more dramatic shake-up in Greek politics, and currency markets are responding accordingly, with the euro moving lower against the greenback as the common currency is down almost a big figure ahead of the opening bell in North America.
While the noise that is emitting from the Greek debt situation is making the investment landscape a challenging one to navigate, from an activity level perspective within the zone, it appears to be having little effect on purchasing manager activity. The Eurozone Composite Purchasing Manager Index hit a four-year high for the month of June, further confirming the ECB’s bond purchase program is helping with confidence and purchasing manager activity throughout the bloc. The strong composite reading for the zone can be attributed to robust prints in both the manufacturing and service industries for the core nations, with Germany and France both posting strong gains from the May survey, and besting economists’ estimates for the month of June. While the uptick in both manufacturing and service activity throughout the core nations is without a doubt good news for the overall zone, investors are more intently focused on the near-term uncertainty around Greece, and are displaying their concerns accordingly by shedding exposure to the euro.
As we get set for the North American open, the main event on the economic docket will be the release of durable goods orders for the month of May. The US economy has been picking up steam after a disappointing first quarter, and while the headline reading is likely to show a decrease on a m/o/m basis due to a slowdown in aircraft orders, the proxy for business investment is expected to show a healthy rebound from the April print of -0.3%. Given the result of last week’s FOMC statement, we estimate the incoming US data points will be under more intense scrutiny as the September Fed meeting closes in, subsequently leading to heightened levels of volatility as traders try to decipher if the economic progress is “decisive” enough to warrant a rate hike in September.
Further reading:
Share
