Surprisingly, US shares have been resilient, eking out very mild gains on a month-to-date basis.
European markets and most Asian equities have been heading lower, and a large part of the downwards move seems to coincide with the selloff in global bonds.
Greece has commanded market attention in the first half of this month, with the many twists and turns in the Greek saga tugging sentiments back and forth. While it may seem exhausting to me that the Greek leadership appeared to throw-out curveballs during the negotiations, the market still continued to play along.
What is perhaps more pertinent are signs that inflation will start to pick up in the Eurozone region, which may have partially contributed to the spike in German bund yields. Both of these themes look set to continue for the second half of the month.
Greece has until the end of the month to hammer out a bailout package before the IMF debt repayment of €1.7 billion expires on Tuesday 30 June. However, given reports that the IMF is withdrawing from its most recent negotiations and that European officials are adopting a tough line towards Greek antics, it is anybody’s guess how the bailout talks may end up.
Perhaps the Greek government should hold a snap referendum to decide if they should accept the latest bailout deal, since they seemed adverse to accept more austerity measures in any agreement. Meanwhile, the implication of a possible Greek default or a Grexit may not be adequately priced in the bond markets.
In the US, a spate of good data brought back expectations of a September Fed Funds rate hike, with yesterday’s retail sales supporting the case. Retail sales was stronger than expected at 1.2% month-on-month, but what really surprised the market was the strength of the non-auto retail sales.
This suggests a likely 1% print in Q2 US GDP, based on the Atlanta Fed’s GDP. Now forecasts are much lower given the stronger retail sales, which could give FOMC some confidence of a rate hike. The Fed decides on monetary policy next Thursday 18 June.
USD strengthened on the data, but could not keep most of the overnight gains in early Asia. The dollar index is hanging on just above the 95 handle.
In Asia, there is some debate on whether the Japanese Yen is weak enough or not. The majority of Japanese officials seemed to think that it has weakened too much, with the comments on Wednesday from Governor Kuroda of the Bank of Japan (BOJ) triggering a sharp recovery in the JPY. The real effective exchange rate does suggest that the currency has experienced a marked depreciation.
JPY fell almost 30% since the BOJ shocked global markets with its launch of Quantitative and Qualitative Easing (QQE) on 4 April 2013, culminating in a 13-year high of 125.63 in USD/JPY recently. Given the strong correlation between JPY and the Nikkei, the bounce in JPY should have substantially impacted Japanese equities.
China may focus on the batch of 24 IPOs scheduled next Friday 19 June where an estimated CNY 5.5 trillion (USD 887 billion) of funds may be locked up. Yesterday’s better-than-expected credit data may reduce the need for more liquidity injection measures by the People’s Bank of China (PBOC).
Admittedly, there are some arguments that the recent money pumping is more to offset capital outflows rather than to stimulate the economy. This means that we’ll need to watch more economic data out from China to justify more cuts to the interest rate or the reserve requirement ratio. With no tier-one data out next week, local investors may eye newsflow once again.