Europe
European stocks made substantial gains on Friday thanks to some of the strongest signs yet that Greece, after months of trying, will reach a deal with its lenders and avert financial crisis.
The spread between core and peripheral government yields came in, demonstrating a belief that risk of contagion from a Greek exit from the Eurozone has subsided.
The latest offer from Athens first needs to win support from the “institutions” before it will be vetted by finance ministers on Saturday then approved by European leaders at a summit on Sunday.
Markets are optimistic because the latest reforms that Greece has said it will enact in order to receive a bailout of €53.5bn appear to be materially the same as those voted down in the referendum. Logically, lenders should accept a deal that they themselves offered a week ago. Judging by comments out of Germany, the market’s logic on this maybe a bit flawed. The previously suggested set of reforms were acceptable for a €7bn loan extension, more is needed for a three year package involving a lot more money.
While risks remain; the two requirements for a Grexident happening together; rejection of Greece’s proposal by the Eurogroup and the European Central Bank ending emergency lending now seems like a pretty remote possibility.
Athens’ latest offer is almost universally seen as a total capitulation so if a deal doesn’t get reached this weekend and then the ECB pulls the plug on Greek banks; creditors would be seen as responsible for Greece’s demise. At the margins, Germany may be willing to let Greece slip out of the Eurozone if it’s seen as an accident or of its own doing. Europe’s history means Germany will want to avoid being seen as the bully that pushed Greece out.
UK stocks were also benefitting from the apparent progress between Athens and Brussels. The FTSE 100 reached its highest in a week.
Relief that Chinese shares are recovering helped resource companies including the mining and energy sector recoup some of the recent losses. Insurers including Aviva Plc (LONDON:AV), Admiral Group Plc (LONDON:ADML), Standard Life (LONDON:SL) and Prudential (LONDON:PRU) rose after a broker upgrade while IAG (LONDON:ICAG) made strong gains after Ryanair Hldgs (LONDON:RYA) agreed to its takeover of Aer Lingus (IR:AERL).
The prospect of a special dividend helped Intercontinental Hotels shares higher by over 3% after the group said it had agreed to sell its Hong Kong division to a consortium of investors for $938m.
US
US stocks leaped higher at the open on Friday, buoyed on by a rise in global market sentiment as Chinese stocks recovered for a second day and Greece looks close to solving its current debt problems.
Fed Chair Janet Yellen will speak later about the economic outlook. The latest Fed minutes identified China as well as Greece as potential pitfalls for the US economy. Janet Yellen’s speech on Friday could offer further detail on how much of a concern the international outlook is for US monetary policy, especially in the light of yesterday’s downgrade to global growth by the IMF.
FX
A return to risk-taking sentiment saw the US Dollar fall across the board on Friday, with only the yen, which has seen even bigger safe-haven flows, down against the greenback.
The euro surged versus the dollar, yen and British pound after Greece’s latest proposal to its creditors offered the best hope yet of a deal. EUR/USD leaped through 1.12 for the first time in July while weakness in the yen helped propel EUR/JPY 2% higher to above 137.
Higher Japanese equities that moved alongside those in China helped contribute towards a weaker yen versus the dollar with USD/JPY breaking above 122.
A smaller than expected UK trade balance in May helped lift the British pound, with GBP/USD moving back above 1.55.
Commodities
Commodities saw a welcome return to lower volatility on Friday, as Chinese equity markets ramped back higher for a second day.
Crude oil came off its highs and extended losses after the IEA said the market was too oversupplied and saw little scope for the supply to be absorbed through higher demand.
Silver has still not closed below $15 per oz despite the dramatic falls seen earlier in the weak hand has since moved back above $15.50.
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