The nervousness of the past month gives way to a more hopeful tone in markets this week with a somewhat more settled outlook for Greece and Shanghai stock market, despite some continuing uncertainty surrounding both of these dynamic issues.
On the data front there are a few key events. In Australia, the highlight is Q2 consumer prices and RBA minutes. Internationally key highlights are the Bank of England Monetary Policy Committee decision with the RBNZ also meeting in New Zealand.
While nervousness persists in the markets outlook Westpac chief economist Bill Evans summed up the current situation in his weekly note saying:
Markets… appear to be of the view that the current Greek controversies are political rather than forboding any significant short term risks for the European economy. Through 2011 the spread between periphery bonds (Italy and Spain) and German bunds blew out by 600 and 375 basis points respectively whereas in the current “crisis” spreads have increased by 25 and 40 basis points respectively. These spreads will have been partly impacted by the ECB’s QE program but much more importantly by the minimal fears around any contagion from Greece to other European countries in the event of a Grexit.
He also highlights the growing school of thought that says the deal is unworkable in the long term without some sort of debt restructure. This is something everyone except Germany seems to accept.
“With the IMF calculating that the only sensible chance for a Greek recovery is a total restructure / moratorium on debt for 30 years the current arrangements which are being negotiated are only likely to further delay another crisis in the near future,” Evans said.
Nevertheless, Greek banks re-open on Monday even if some capital controls remain in place.
While stocks in Shanghai had a mid-week swoon they recovered on Thursday and Friday to end the week on a firmer footing. it seems that authorities are slowly winning the battle for the hearts and minds of traders and investors. So while their actions might rankle many western observers, arguably it has really just been QE on steroids and implemented at the speed of light.
The other major event over the past week has been the reaffirmation from Janet Yellen that she is on track to raise rates in the US this year. That, along with individual events like a reduction in tension over Greece, a Bank of Canada rate cut, and a weak dairy auction in New Zealand, have put the US dollar in the ascendancy once again. That pushed the Euro back toward 108, its lowest level since May. The Kiwi made a six-year low and the Canadian dollar hit 11-year lows. The Aussie dollar by contrast found support at 0.7350 but that too was a new six-year low.
This week might see a changing of the guard from stock and bond market leadership to forex volatility.
Turning to stocks and global investment bank UBS said in a note on Friday that after all the volatility and selling pressure ‘the bears are bloodied and have little to show for their tenacity.’ That’s fed the bounce the the S&P, Dow and helped the Nasdaq to a new all-time high.
Turning to the data and we’ve got inflation, RBA minutes, and Glenn Stevens giving his annual Anika Foundation speech. With Stevens, while no topic has been released yet, it is worth noting that this has become a very important speech on the RBA governor’s calendar over the years and often sets out the RBA’s agenda and thought process in regards the economic environment current and prospective.
The RBA minutes aren’t expected to be contentious when they are released on Tuesday and while the CPI isn’t expected to influence monetary policy anytime soon when it comes out on Wednesday it will be interesting to see the impact of the boounce in petrol prices. However, the NAB said in its What to Watch, released Friday, that “June quarter CPI is expected to reflect a picture of generally subdued price pressures, though the reversal of recent declines in petrol prices will see a high headline inflation rate for Q2 that’s expected to increase 0.8 q/q, taking annual inflation to 1.7%.”
In terms of domestic politics there are two important themes – the Reclaim Australia rallies over the weekend have resurfaced some community tensions which we can expect the nation to be talking about this week. Also the position of the Speaker of the House, Bronwyn Bishop, is under pressure with the continued scrutiny of her use of taxpayer dollars for grandiose transport arrangements. While these are both important topics they provide a continuing distraction for politicians from tackling the issues of fragility in the economy.
Internationally the Bank of England MPC vote on Wednesday night is going to be huge for currency traders. It’s too early for a rate hike but last week BoE Governor Carney certainly hinted the BoE was moving down that track. That means that in some ways the inflation report hearings in the UK are just as important.
Thursday morning sees the release of the RBNZ interest rate decision and monetary policy statement. With expectations growing that the RBNZ will be taking rates to a terminal, and new all time low, of 2% the only surprise would be if they do and say nothing.
Germany has a fairly quiet week except for PPI on Monday, Japan is out for the day Monday on a public holiday and in the US there is a little bit of second tier data with the release of Redbook on Tuesday, housing prices and Markit composite and services PMI’s as well as existing home sales. Thursday is jobless claims.
On China the NAB says: “It’s a very light week for China releases, with only the unofficial Caixin China Manufacturing PMI (previously the HSBC Manufacturing PMI) set for release on Friday, following this Saturday’s June property prices report that will be scrutinised for any sign of further price stability in the major cities.”
Probably a good thing after a hectic month.
Now here is Westpac’s excellent diary of all the events and data for the week ahead.