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Greek concerns underpin sentiments

It’s not surprising to see creditors on the other side of the negotiation table playing down Greece officials’ optimism on the bailout deal.

Tourists stand and look at the view beside a Greek national flag flying above a house in Oia village
Source: Bloomberg

IMF head Christine Largarde mentioned while a Grexit is possible, it will not spell the end of the monetary union. Whereas ECB’s Vitor Constancio believed that Greek banks can withstand default. EU commissioner Moscovici warned that a lot more work needs to be done.

Therefore, it seems strange for Tsipras’ team to jump the gun before any clear progress of the deal talks was seen. Greece needs to cough up €1.5 billion to loan repayments in June, with a tranche of €300 million which is due as early as next Friday. In addition, they need to service a total of around €500 million in interest payments next month.

The Greeks have already said they have no money to pay, meaning a default on IMF repayment due on Friday 5 June 2015 is possible if there is no agreement soon. Judging from their comments, the troika appears to be preparing the global financial markets for a Greek default.

Markets are certainly not impressed with this latest development out of Eurozone, with European and US equities ending their sessions lower. This underlying caution in global sentiments was also reflected in flattening yield curves in the bond markets. In the currency markets, however, EUR/USD headed higher. This is hardly characteristic of a region under-sieged from a potential Greek tragedy.

But if you look at what dollar is doing, it will make more sense. The dollar index slipped below 97 after some dovish statements from a pair of Fed presidents. St Louis’ Bullard said the Fed’s policy has not given a boost for the US economy, while Minneapolis’ Kocherlakota brought out the ‘patient’ word, reiterating that the FOMC must not tighten rates this year.

Furthermore, a second estimate to the US Q1 GDP is to be reported tonight where the consensus look for a downward revision to a negative print. Nonetheless, expectations are building up for a solid non-farm payroll growth in May, after jobless claims data continue to show a strengthening labour market. This may help cushion further USD pullbacks.

Keeping an eye on China

In Asia, investors will be watching the Chinese markets closely after yesterday’s rout. It is worthwhile to remember that retail investors make up about 80% of trading volume in local equities, which suggests that a ‘sheep mentality’ is dominant.

A direct consequence of this retail-driven market has large fluctuations and overreactions as retail investors react more to news flows than fundamentals.

In Japan, core CPI rose 0.3%, higher than what the market is expecting, at 0.2%. However, the Bank of Japan’s preferred inflation gauge, which is core inflation excluding last year’s sales-tax hike, slowed to zero.

The BOJ has refrained from expanding its massive asset purchase programme last week, with governor Kuroda remaining optimistic that the price trend will gradually improve to meet their 2% inflation target. He was hopeful that the low energy costs will boost demand, which will filter through to higher price pressures. April inflation reading dampens that optimism.

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