– Overnight trade was dominated by a relief rally in stocks, a little bond selling in the US and general US dollar strength after the EU leadership and Greece announced they reached a deal late in Asian trade yesterday. It’s a deal which comes with EUR86 billion in aid for Greece on the basis that they agree to spending cuts, pension and tax reform, administrative reform and heavy oversight from the EU during the period of the agreement. It goes beyond the deal which was rejected by the 61% vote in the referendum which means Greek prime minister Alexis Tsipras has some serious opposition both within and outside Greek parliament. He’ll have to rely on opposition party MP’s to get the deal through because at least four ministers and 30 members of his own party have spoken out against the deal. If it does get through parliament the deal then has to be voted through each of the member parliaments. To this end it’s interesting that the Finnish finance minister, talking on the BBC early this morning, suggested the trust issue could be a big one for his country.
– None of that matters for traders though. They reacted as though everything is now complete in Greece and bought stocks sharply higher. The DAX was up 1.5%, the CAC in Paris around 2% and even though London lagged, it was still up a solid 1%. This helped the US market rocket higher, with the Dow up more than 200 points for a 1.2% gain awhile the Nasdaq was up 1.48% and the S&P 500 just missed closing at 2,100 with a gain of 1.1%.
– The corollary of the US stock market rally was weakness in US bond rates. That saw 10 year bonds head up toward recent highs with a selloff of 5 points to 2.45%. That kicked Australian 10 year rates up another 5 points to 3.05 with the 3 yeqars up 3 points to 2.045%. Strangely German rates rallied 4 points to 0.86% along with similar moves in Italy and Spain.
– On forex markets the US dollar strengthened as the Greek agreement, or at least the announcement of the deal, subject to EU member ratification, refocused attention on the Fed’s plans for interest rates this year and when the tightening cycle will begin. That mean US dollar buying and general weakness across the board. The Aussie dollar, along with the Yen, could come under pressure again now that Greece has a deal. Sterling is weaker as is the CAD and the Kiwi.
– Turning back to Greece for a moment. As bad as the deal is perceived by many and as bad as the Greek population may take it when they realise the impact of the privatisation agreement embedded in the deal, the reality is that many of the reforms should have happened years ago. Also while there may have been no haircut for Greece on its debt the door might have been left slightly ajar by German Chancellor Merkel last night. The NAB reports this morning:
German Chancellor Angela Merkel stressed there will be no debt haircut: “The Euro Summit stresses that nominal haircuts on the debt cannot be undertaken.” European politicians must say one thing to each other, another to financial markets and yet another to domestic audiences. Adding another €86 billion gross of debt — albeit some will be used to pay off existing loans — takes Greece’s debt/GDP ratio over 200%. The chances of this ever being repaid in part or in full are close to zero. This inconvenient truth will only be hidden for the time being.
They are right on the debt and Merkel’s comments referencing “nominal” haircut leaves the door open for super low rates or an inflation adjusted accommodation for Greece. We won’t know for a while.
Here’s the overnight scoreboard (7.31am AEST):
- Dow Jones up 1.22% to 17,977
- Nasdaq up 1.48% to 5,071
- S&P 500 up up 1.11% to 2,099
- London (FTSE 100) up up 0.97% to 6,737
- Frankfurt (DAX) up up 1.49% to 11,484
- Tokyo (Nikkei) up 1.6% to 20,089
- Shanghai (composite) up 2.41% to 3,971
- Hong Kong (Hang Seng)up 1.3% to 25,224
- ASX Futures overnight (SPI September) up 91 points to 5,495
- US 10 Year Bonds +5 to 2.45%
- German 10 Year Bonds -4 to 0.86%%
- Australian 10 Year Bonds +5 to 3.05%
- AUDUSD: 0.7397
- EURUSD: 1.1004
- USDJPY: 123.42
- GBPUSD: 1.5482
- USDCAD: 1.2735
- Crude: $52.20
- Gold: $1,157
- Dalian Iron Ore (September): 369
– It looks like the local market is going to ignite on the open this morning with as strong lead from futures overnight. With the UK market up on the back of the banks they are likely to be strong contenders as well today. That makes sense because if Shanghai has stopped falling and been underpinned by government action and if Greece is no-longer the clear and present danger that it was a relief rally where traders seek to find the right “level” for the market would be expected. Having bounced off the bottom of the uptrend channel, stretching back to 2012, traders have a convergence of fundamentals and technicals at the moment. 5,575 is the level to watch in the physical.
– In Asia yesterday no-one seemed game to take on Chinese authorities as stocks rallied for a third consecutive day. That makes sense given the measures in place and the investigation of “malicious” short sellers. The government seems to be trying to walk the Shanghai composite up above 4,000 toward 4,500. For the minute they are winning and while their measures may seem unpalatable in the end it’s just another meme to add to market chatter. Don’t fight the Fed, don’t fight the CCP.
– On commodity markets last night OPEC met and said it expects a more balanced market going forward. That’s something oil traders want to hear after the big dip recently. But the price is still in the low $52 region. Copper was up a little to $2.55 a pound while gold continues to be friendless. It’s at $1,157 this morning. On the iron ore market Dalian closed at 369, down a little from this time yesterday but up on the day.
– On the data front today we get ANZ consumer confidence and the NAB Business Index. Still waiting on Chinese new loan data and tonight we get German CPI along with similar releases in Spain, Italy and the UK. PPI releases are also out across the region as is the ZEW survey in Germany. In the US its a big night with the release of retail sales for June. They’ll be watched closely because of what they convey about the current state of the massive US consumer sector.