Greece a persistent thorn

Equities seem oblivious to some of the developments brewing in the global macro space at the moment.

Greece
Source: Bloomberg

In the US, we have equities at another record, treasury yields spiking again, the US dollar stronger while Q2 data hasn’t quite shown signs of rebounding from Q1 as many thought. This is a confusing situation all round and at some stage something’s got to give. Later today, we’ll have some data that’ll give us more insight on how US housing is performing with building permits and housing starts on the calendar. However, the big one will be the FOMC meeting minutes and these will likely dictate sentiment for the rest of the week.

China investing in infrastructure

China property prices for April released yesterday showed a 6.1% fall. However, there were signs of stability in Beijing and Shanghai. Given bad news is generally good for Chinese equities, perhaps this will weigh on the stimulus trade in the medium term. However, for now equities in China remain undeterred and back to winning ways today. While investors are naturally reaping the benefits of the rally, it’s also interesting to note the government has plenty of holdings in listed state-owned enterprises. While it’s not as easy to translate this into economic prosperity, it seems to be lifting confidence particularly in brokerage firms. Reports China will spend $40 billion on rail projects will go a long way towards supporting the stimulus trade in the near term.

How much longer can jawboning work?

Greenback strength saw AUD/USD dip below $0.8000 ahead of today’s monetary policy meeting minutes from the May meeting. Traders seems to be favouring shorts following RBA Deputy Governor Lowe’s comments yesterday where he essentially said there is room to ease further. Today’s minutes seemed to reinforce the idea that the RBA maintains an easing bias but judging by the price action in the AUD, the impact of jawboning is starting to wane. The May rate cut seems to have been a move to pre-empt further weakness in resources, slightly lower inflation and further rise in unemployment. While the inclination is still towards easing, as far as this cycle is concerned it seems like the RBA is happy to be on hold for a prolonged period. After the February cut, the RBA waited three months before cutting again of which if it wasn’t for the budget, the cut would have probably only arrived in June. Additionally this was during a period where there was significant pressure on the domestic economy. Given we’ve now had two rate cuts and it’s clear borrowing costs are not the problem then I doubt the RBA will be in a hurry to cut again this year. The recent budget was market friendly enough not to put further pressure on the RBA to cut unless the situation deteriorates further. Having said that, how much longer can RBA jawboning work without actually cutting? Unless the USD rallies, downward pressure could be limited for the pair. Already we’ve seen some traders looking to buy dips in the AUD in the short term. Traders will have to be very careful on AUD shorts in the near term.

Confusing time for Europe

There were some mixed feelings about the performances across Europe yesterday as Greek concerns caused strain for the periphery while the weaker euro actually boosted the DAX. Just to put it into perspective, the MIB and Greek equities were weaker while the IBEX and CAC were mildly firmer. However the DAX rallied a whopping 1.3% as EUR/USD dipped to the $1.1300 region, down from near 1.1500 where it had been trading prior. Contradictory comments from Greece and EU set alarm bells off yet again. Greece feels bailout negotiations are in final stages while the EU says more time and effort is needed to bridge the gap. It seems Greece has not made enough progress to achieve a deal at the forthcoming Eurogroup meeting in Riga and this is a disappointment to the market. Meanwhile Greece PM feels any agreement should include debt restructuring, lower primary surplus targets along with no cuts to wages or pensions. These are substantial demands which could take a while to iron out if the EU even considers it in the first place. On the calendar we have the ZEW economic sentiment reading, final Eurozone CPI and UK CPI.

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