Greece Situation Coming To A Head

KEY DRIVERS

• Greece voted “No” to accepting the demands of the creditors and although this gives Tsipras a renewed mandate to ask for more concessions over a deal, actually achieving it is another factor entirely. The ECB has not raised the Emergency Liquidity Assistance ceiling from €89bn and the Greek banks remain closed. Greece owes around €3.5bn to the ECB on 20th July however before the banks could run out of cash (some estimates putting it between possibly a couple of days up to a week maybe).

  The Greek government may need to start paying its bills with IOUs that will in effect become some sort of parallel currency. It would appear that the situation is becoming increasingly desperate for the Greek people and the minds of the negotiators will need to be increasingly focused now to prevent Greece from leaving the Eurozone and printing its own money. Today’s meeting of the Eurogroup could be critical, with reports that Wolfgang Schaeuble’s camp suggesting a debt haircut is not possible within EU law. The Greece situation is coming to a head and markets are gripped.

• Several analysts are now suggesting that their base case is a Grexit. I am still more of the opinion that Merkel does not want her lasting legacy to be the politician that broke the Eurozone. I feel that some sort of compromise will be made that will maintain the project in its current form. There are such a chain of factors that could occur (Podemos in Spain will be watching events very closely).
• The main strain will be seen in sovereign debt markets of the Eurozone. Yesterday the core/periphery yield spread shot higher and although Spanish yields are slightly lower, German yields continue to fall (now at a 5 week low). The German yield is still a signal for movement on the euro too.
• Forex markets are showing dollar strength has taken over once more. The falling euro is a symptom of this. However we are also seeing stress in the commodity currencies, with Aussie and Kiwi at multi year lows and the Canadian loonie also under pressure. The RBNZ and the RBA have certainly not helped as they continue to talk their currencies lower. The demand for the safe haven yen is reasonable (certainly against the dollar).
• As alluded to above, the commodity markets are under pressure again. The ongoing sell-off on the Chinese equity markets is certainly adding to the strain, whilst problems in Europe add to demand concerns, whilst the strength of the dollar is also an issue. The oil prices are now under corrective strain, with WTI well over 10% lower in the past week or so. Gold is also failing to see any reliable safe haven flows and also remains under pressure from a strengthening dollar.
• Equity markets are volatile and under pressure as traders look more towards the safe haven of bonds of Treasuries and Bunds. The bears certainly have control and rallies are being sold into. Earnings season which starts in the US on Wednesday with Alcoa (NYSE:AA) will need to start off well otherwise there will be further selling pressure coming through.
• There will also be a focus on the FOMC minutes on Wednesday. Focus will be on any hawkish hints at a rate hike in 2015. The markets are now pricing a hike this year as unlikely, so a hawkish set of minutes could realign this once again. Other than that, clear focus will be on developments with Greece which continues to dominates the thoughts of traders around the world.
• The UK will be focusing on any further extension of austerity measures in the UK Budget on Wednesday, whilst there is nothing interesting expected to come out of the Bank of England’s monetary policy.
• Watch for: Developments with Greece, FOMC minutes

MARKETS

EUR/USD – The decisive break below $1.0950 re-opens $1.0820

• The impact and gravity of the Greek crisis is increasingly draining on the euro. The situation could be coming to a head now with Greece close to running out of cash. Watch the demand for safe haven German Bunds to gauge the market’s concerns.
• The $1.1050 pivot has been breached and the outlook is now under pressure. The low of last Monday at $1.0953 is creaking and a decisive breach opens $1.0820. Momentum is increasingly bearish
• Watch for: Developments with Greece, FOMC minutes

GBP/USD – The support around $1.5450 is now being tested

• Despite a mixed set of UK production numbers (industrial and manufacturing) the selling pressure on Cable suggests that sterling is being dragged lower with the euro. The stronger dollar is impacting across the majors but it will be interesting to see is sterling continues to be sold off. The Bank of England monetary policy is unlikely to change too much, whilst the Fed meeting minutes will be watched.
• A pullback to the support band around $1.5450 has been seen and I have been expecting a low to be formed around here, so this decline is starting to become important. Momentum indicators are now back towards the levels at which the bulls will be supporting if this is just a counter bull trend move. A decisive breach of $1.5450 opens $1.5170.
• Watch for: Developments with Greece, FOMC minutes, BoE monetary policy

USD/JPY – Continue to expect a key low in place around 122

• There has been an interesting lack of yen demand over the dollar considering the Eurozone troubles. The FOMC minutes will certainly be eyed for any hawkish hints.
• I continue to expect the next key low to come in around 122.00 (the old key breakout level) and with intraday moves below 122 continually being bought into, I remain confident of this. Trading near term using the Fibonacci retracement levels of the 118.86/125.85 rally is still possible.
• Watch for: Developments with Greece, FOMC minutes

Gold – Continue to sell into strength for the gradual drift lower

• Even with gold’s supposed safe haven status this has not prevented the bearish drift continuing. The negative correlation between gold and the dollar is winning over and as the dollar has strengthened in the past couple of weeks, gold has been under pressure. Initial knee jerk moves higher fail to inspire the bulls with impetus quickly draining away again.
• The outlook for gold continues to push on supports and rallies are being sold into. The drift lower means that the low around $1157 is likely to be tested. Resistance comes in the band $1175/$1180.
• Watch for: Developments with Greece, FOMC minutes

Indices – Sentiment driven by Greece and Bund yields, also US earnings season

• S&P 500 – The rally rolled over around 2080 and this could be a concern now if the momentum gathers to the downside. The support of the key March low at 2040 is crucial now. The focus can finally switch (to a certain extent) back to earnings season that starts again this week. However, a strengthening dollar and falling commodity prices may not inspire the outlook statement on Alcoa, the company that traditionally kicks off the corporate announcements in the States.
• DAX Xetra – Huge volatility continues, and the support at 10,800 is creaking. A close below 10,800 would be a significant blow as it would open further retracement of the big bull run and take the DAX to a 5 month closing low. The momentum indicators are really beginning to drag on sentiment. It is not an exaggeration to suggest that the outcome of the negotiations with Greece in the coming days will be crucial to the near/medium term outlook.
• FTSE 100 – The FTSE 100 may be less volatile than other indices but that is not helping the fact that the index is pushing on its lowest levels since January and momentum indicators remain very weak. The high weighting in banks (European banks are under huge pressure from exposure to Greece), energy companies (falling oil price) and mining stocks (copper price back at a 5 month low) is a real drag on the index. A close below 6520 opens further weakness towards 6300.

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