Undulating sentiment regarding the chances of a Greek default or a new bailout deal dominated the headlines yet again this week, swinging from optimism to despair and back again in the course of just a few days. Aside from volatility in Greece and a sharp correction in the Chinese markets, stocks, bonds, and commodities around the world mostly moved sideways awaiting something definitive on the debt crisis in the euro area.
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GOVERNMENT & POLICY
News & Notes
Treasury Secretary Jack Lew announces that a woman to be added to $10 bill rather than replacing Andrew Jackson on the $20 note, as originally proposed.
GOP mavericks Rand Paul and Ted Cruz seize upon the budget battle in the U.S. Senate ahead of the primary elections, tabbing defense spending and the debt ceiling as the two major priorities.
After decoupling the Swiss franc from the euro in January, keeping interest rates negative, and holding a referendum last year that would have essentially returned its monetary system to a gold standard, the Swiss central bank is trying to weather the storm in Europe. The Swiss franc (CHF) fell after SNB President Thomas Jordan called the currency “markedly” overvalued.
It has surfaced that the NSA spied extensively on the last three French presidents, including current leader François Hollande in 2012. Following the Snowden leaks, President Obama vowed that the U.S. would no longer engage in espionage against its allies, but the NSA has also been implicated in spying on Germany and Brazil’s respective heads of state, Angela Merkel and Dilma Rousseff.
The U.S. Supreme Court votes 6-3 in favor of keeping key tax subsidies in the Affordable Care Act (ACA) intact, effectively quashing some of the most promising legal challenges to the sweeping healthcare legislation colloquially known as “Obamacare.”
Louisiana Governor Bobby Jindal announces that he is running for the GOP presidential nomination.
Obama’s fast-track trade bill clears its final vote in Senate and awaits the president’s signature.
Federal Reserve Governor Jerome Powell gives a “50-50 chance” of a September rate hike.
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MARKETS
Greek Impasse Continues to Hold Spotlight
The volley back-and-forth between Greece and its creditors, oscillating between fresh optimism and demur, sent global markets down, up, and back where they started this week. Expect still more delays and drama, considering that public perception weighs heavily on the decisions of both sides.
In the same way that the Fed ought to normalize rates in due time but instead stresses patience to keep the markets swimming along, Greece’s economy ought to go through a default and subsequent devaluation in order to set itself on a path toward recovery and becoming competitive. There is only so long that these proverbial cans can be kicked down the road before something gives, but political agendas will likely encourage both the Greek government and its European creditors to simply extend the issue with more debt.
European stocks and bonds rallied on Monday morning before later erasing their gains. Crude oil followed the same pattern, reversing to slightly negative to close the day at $59.25/bbl (WTI) and $62.50/bbl (Brent). Gains for oil have been capped by the accumulation of huge crude inventories held offshore. The U.S. has also been pumping about 10 million barrels per day, the highest output levels since the 1970s. At the same time, the drop in oil prices caused spending on mines, shafts, and wells to tumble 49% during the first quarter.
The 10-year Treasury note opened the week with a 2.30% yield before stumbling, with yields jumping 7 basis points Monday. Gold, silver, and platinum each lost double-digit dollar amounts on Greek optimism while silver diverged, adding 15 cents to $16.30/oz. U.S. indices advanced while shares were up nearly 4% across Europe. In Asia, the Nikkei 225 and the Hang Seng index (Hong Kong) both added 1.2%.
Several economic indicators signaled improvement in the housing market. Existing home sales rose 5.1% in May to a 6-year high, largely driven by first-time buyers. Meanwhile, the median price of existing homes for sale increased 8% year-over-year to more than $228,000, with this growth fueled by lower borrowing costs from government mortgage lenders Freddie Mac and Fannie Mae. New home sales posted an annualized gain of 2.2% in May, the highest in 7 years, with an 87.5% increase in the northeast. This lifted the NAHB/Wells Fargo homebuilder sentiment gauge to its strongest levels since September.
Shares in Europe and Asia rallied again on Tuesday while U.S. indices ended mostly flat thanks to a 1.8% drop in durable goods orders in May. Capitals goods orders did rise, however, for just the second time this year. Even as the S&P 500 nears record highs, the index has not seen a 2% move in either direction in 130 trading days, revealing the idle trend of the stock market lately. (By comparison, the S&P moved 2% or more on 10 different trading days over the last two years.)
Gold fell about $5 on Tuesday as the dollar jumped to 95.4 on the DXY index. Spot silver plunged through support at $16/oz after losing 35 cents on the day, while palladium was unchanged at $700/oz. Platinum’s spread below the gold price narrowed to $110/oz. This spread was only $90/oz by week’s end. Both of the crude oil benchmarks actually advanced about 1.5% after opening in the red, each closing above $61/bbl.
Wednesday saw U.S. equities fall 0.7%, with the Dow leading the way 180 points lower (-1%). Despite the souring of Greek talks, Asian markets were modestly in positive territory, as Japanese shares celebrated their highest close since 1996 and the beleaguered Shanghai Composite index briefly bounced back 2.5%. The metals opened lower before recovering throughout the trading day back near unchanged, as did Treasury yields. The corporate outlook in the U.S. caught an unexpected boost when the economic contraction during the first quarter was revised to only -0.2%.
Despite the gold options expiry falling on Thursday, which usually leads to higher trading volumes and volatility, the yellow metal trickled just $2 lower to $1,175/oz, where it would close the week. Silver similarly resisted budging from $15.95/oz, losing just 4 cents. Platinum (+$10) and palladium (-$17) were far more active, though data released this week showed gold and silver did see an uptick in trading volumes during May. The DXY held at 95.3 by week’s end while the euro slid to about $1.12. Barclays is forecasting a weak Q3 for the gold price followed by a modest recovery, and predicts that the euro and the dollar could come into close parity by 2016.
Stock indices in the U.S. and Europe traded sideways on Thursday with no breaking developments in the Greek situation. Jobless claims came in below 300,000 for the 16th consecutive week, taken as a sign of momentum in the labor market. Consumer spending accelerated by the most in 6 years during May, while consumer sentiment registered at a 5-month high in June. WTI crude fell by 1% to $59.65/bbl, although Brent crude was only 0.25% lower at $63.35/bbl.
Shares in Asia were deeper in the red Thursday, as Chinese stocks continue to reel from their recent highs. China’s CSI 300 IT index of tech shares had been trading at a staggering 74 times total earnings before dropping by more than 6% on Thursday. The Hang Seng fell nearly 1.8% the next trading day, while Shanghai closed out the week with a -7.4% massacre. Last week’s -13% correction for the Shanghai index erased a whopping $1.3 trillion in value from mainland equities. Since reaching a 6-year high in mid-June, the bellwether Chinese stock index has lost 19% in just two weeks. Even Japan’s Nikkei lost 0.3% on Friday.
The precious metals were almost perfectly flat on Friday, as was the S&P 500. Markets appeared hesitant with the uncertain outcome of Greece’s debt conundrum still to be decided over the weekend. The Dow Industrials added 0.3% while the Nasdaq sank 0.6% lower. Europe was down nearly across the board, though the EURO STOXX 50 (ESTX 50) and France’s CAC 40 both advanced about 0.5%. After opening about 1% lower, the crude oil benchmarks each returned to their previous levels: WTI crude was just below $60/bbl on Friday and Brent crude sat slightly above $63/bbl. Treasuries fell again, with the 10-year yield settling at 2.47%.
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M&A News
- Verizon finalizes a $4.4-billion acquisition of AOL after months of speculation that Yahoo! would do so.
- Cigna rejects a $47-billion takeover bid from Anthem, possibly emboldening competitors within the health insurance market to make their own bids.
- Also in health insurance, Aetna is close to finishing a deal to acquire rival Humana. Overall, there has been strong M&A momentum in healthcare of late.
- French cable and mobile services provider Altice bids €10 billion ($11 billion) to acquire telecom rival Bouygues, prompting the French economic minister to look into the matter. Bouygues shares fall more than 8% after rejecting the bid, while Altice also slips by 6%.
- Siding with the FTC, a judge issues an injunction to halt Sysco’s $3.5-billion takeover of U.S. Foods.
- Shares of pipeline builder Grant Williams jump 26% after the company rejects an offer of $64 per share ($48 billion total) from Energy Transfer.
- 3M, the maker of Post-Its and Scotch tape, is expected to buy Capital Safety for $2.5 billion from KKR & Co. 3M also recently acquired Ivera Medical Corp., and has a pending $1-billion deal from February for Polypore International Inc.’s filtration business.
- Dutch grocer Royal Ahold approves a merger deal worth €26 billion ($29.5 billion) with Belgian rival Delhaize Group. The move creates one of the biggest food retailers in both the United States and across the Atlantic in Europe. Delhaize shares slide about 7.5% after the all-share takeover was agreed to.
- Generic drug maker Mylan will hold a shareholder vote on its proposed hostile bid for Irish rival Perrigo. This comes shortly after Mylan rejected a $40-billion takeover offer from Teva in April.
- Sequential Brands buys Martha Stewart Living Omnimedia for $353 million.
- Pharmaceutical giant Pfizer acquires meningitis vaccines from Britain’s GlaxoSmithKline for $130 million.
- Italy’s Ferrero, the world’s largest producer of chocolate, bids €112 million ($125.5 million) for confectionery company Thorntons.
M&As are likely to reach a new record high this year, besting the previous marks set in 2007; many analysts see this development as aiding otherwise modest hedge fund returns.
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GEOPOLITICS & WORLD EVENTS
Despite Progress, Brinkmanship Between Greece, Europe Won’t Relent
Greek markets opened the week on a wave of optimism, as Athens finally presented its creditors with a proposal that could be deemed “reasonable” in its concessions to the lending institutions. The apparent breakthrough was muddled by the sophomoric distribution of multiple versions of the proposal at the last minute, generating considerable confusion among the gathered finance ministers. At any rate, the two sides finally reached what might approximate consensus on the need for Greece to reform its pension system and push back its retirement age.
This clear step in the right direction (for the near term, anyway) generated a bevy of positive responses: Shares on the Athens Stock Exchange rose 9% Monday, 10-year Greek bond yields fell 150 basis points, and Credit Suisse charitably gave the chances of a new deal being reached at 75%. Athens rose another 6% on Tuesday, and the fresh demand for short- and medium-term bonds was no doubt welcomed.
Dutch Finance Minister Jeroen Dijsselbloem, who heads all gatherings of the eurozone finance ministers, expressed optimism about the chances of a deal this week amid almost constant talks among the big players in European finance and politics. Most of the other finance chiefs were more downbeat, characterizing the non-stop talks this week as a waste of time and airplane tickets.
The main sticking points continue to center around how Greece will generate the revenues it proposes in its most recent offer to creditors. The Syriza government wants to heavily increase corporate tax rates, but the creditors have warned that this may stymie growth, and Greece has a notoriously poor track record of tax collection as it stands.
By the time a two-day EU summit began in Brussels, Belgium on Thursday afternoon, it remained unclear whether or not either camp possessed the political will to get a meaningful deal brokered. Both the EU-EC officials and the Greek administration have publicly expressed their desire to keep the country’s eurozone membership (and thus the integrity of the economic union as a whole) intact; polls have shown that the Greek electorate seconds this opinion. While each side continues to hedge their position so that, in the event of a bitter ending, the political buck can be passed to the other, the ECB has quietly increased its emergency aid limits to Greek banks four times over the past week.
Yet, much of the European populace (particularly in Germany and the Low Countries) seems to be drifting further away from supporting this reconciliation, turned off by the Greek negotiators’ brinksmanship that has dragged out discussions over the past five months. As the Greek government erodes its political capital with the rest of Europe, presumably for the sake of gaining leverage and securing the most favorable debt relief deal and emergency liquidity extension possible, the overarching flaw in the grand experiment of the euro’s Economic and Monetary Union (EMU) is revealed: Member nations share a single currency but no central fiscal authority. In the absence of a Euro Treasury of sorts, the EMU will remain susceptible to continued financial crises as countries endlessly grapple over each other’s fiscal policies. This is why many are calling for the dissolution of the EU entirely, particularly if Greece is the first domino to fall. Italy, Spain, and Portugal could follow.
Key Greece Statistics:
- Debt: owes Germany alone €56 billion (~20% of their total owed)
- 177% debt-to-GDP ratio
- Growth: 25% fall in GDP since 2010; 26% unemployment rate, youth joblessness over 56%
- Represents <2% of eurozone GDP
- Greek bank deposits at 11-year lows; €30 billion in outflows thus far in 2015
- Demographics: 33% of the population is over 55, while 24% under 24; this topheavy trend is partly why Greek pensions are broken
- Markets: Athens Stock Exchange index (ATX) is down 26% on year, and has lost 85% from its 2007 high
- ATX gained nearly 14% this week (despite midweek losses) on the back of 4 consecutive winning sessions
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On Wednesday, discussions ended abruptly after Greece and eurozone officials exchanged counterproposals. After Tsipras’ latest deal was rebuffed, stocks in Athens sank 4% and Greek bonds again slumped. European finance ministers once more turned their thoughts toward “Plan B” in case of default, a return to the drachma, and the imposition of capital controls in Greece. Thursday saw still more deadlock. Outspoken Bundesbank president Jens Weidmann even suggested that the emergency liquidity assistance (ELA) Greece has received from the central bank may violate the laws governing how the ECB disburses financial aid, as the ELA was originally conceived to aid individual banks, not entire countries.
It has been somewhat lost on outside observers that when Greece secured its last bailout and round of debt relief, the previous administration was secretly engaging in deficit spending that broke the rules of the financial assistance the government was receiving. Whatever Syriza’s strategic missteps and philosophical shortcomings, no country can quickly climb out of the hole dug by this unfettered spending combined with rampant tax evasion.
While everyone involved in the negotiations seems to agree that a deal of some kind is better than an exit from the euro, both sides are understandably wary of being rushed into an 11th-hour agreement. While talks remained stalled on Friday morning, the creditors did place a 5-month, $17-billion extension offer on the table that should provide with the needed time and funding for Tsipras to sell the deal to his party and Parliament. From this perspective, an extension may be the surest way to diffuse Tsipras’ brinksmanship. German FM Schaüble most recently put the chances of an agreement at 50-50, an encouraging sign given the finance minister’s hardline stance on austere budgetary policy for all of Europe.
The Greek prime minister is expected to meet with French President Hollande and German Chancellor Merkel Friday evening. Yanis Varoufakis, the Greek finance minister, commented Friday that a deal over the weekend is likely.
Until then, we will all have to wait and see if this saga plays out like a Greek tragedy in the end.
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News & Notes
The Iran nuclear deal remains highly politicized, with its outcome up in the air only a week from Iran’s self-imposed deadline. The country’s Supreme Leader, Ayatollah Ali Khamenei, insists that there will be no nuclear facility inspections, no time restrictions, and that sanctions must be lifted completely before Iran makes any concessions
A U.S. District court hears an investor suits this week against state-owned Brazilian oil giant Petrobras regarding a massive, endemic bribery scandal involving the country’s biggest construction firms. Although Petrobras can make a compelling case that it was the victim of corruption, under U.S. corporate law, the oil company can still be held liable for claims it made to investors. Petrobras is currently valued at about $60 billion, down from $310 billion in 2010, then the fifth-largest corporation in the world.
The continuing MERS crisis in South Korea prompts the country’s central bank to introduce fiscal stimulus.
The cyclical El Niño weather pattern threatens to disrupt the global economy. El Niño typically brings a drought to Asia and a downpour to South America, while a monsoon in India could throw inflation off course.
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A LOOK AHEAD: Retail sales and industrial production numbers from Japan will be announced on Sunday; Monday sees the release of economic sentiment data from the European Commission and the latest German CPI, as well as the Dallas Fed manufacturing survey and the pending home sales index in the States. A host of PMI data comes out across the developed world throughout the week.
