Daily Briefing: Euro zone – untangling itself on Greece

Euro zone countries, and specifically a group of northern countries led by Germany, will try today to untangle their own position on Greece.

Berlin and the others insist that the IMF should be kept on board to keep the wider bailout plan credible, yet oppose any firm commitments on debt relief – the very thing the IMF is pushing for. Athens for its part has done what it could to secure a deal, with parliament last week pushing through more pensions and tax reforms. One euro zone official put the chances of a deal at no better than 50-50; if there is one, Greece has tentative plans to return to bond markets in July.

The move by Spain’s Socialists on Sunday to bring back former leader and hardliner Pedro Sanchez to head the party will make it harder for conservative Prime Minister Mariano Rajoy to secure the support he needs in parliament to push through pro-market, deficit-cutting reforms. Sanchez’s next steps will be watched very closely: Rajoy has warned he would trigger a new national election if there is stalemate in parliament.

What has happened to Prime Minister Theresa May’s polling ahead of the June election? A string of opinion polls now show the Conservative lead over Labour has practically halved due to her proposal to means-test social care for the elderly. The opposition Labour party has quickly dubbed the measure the “dementia tax” and it is sticking. The irony is that this was part of May’s attempts to lure Labour voters with a policy intended to be redistributive, i.e. to penalise the rich while helping the poor. It may be back-firing.

A bumper start to the week for Asia equities after the S&P500’s hefty gains on Friday shows how quickly markets are willing to see last week’s mounting pressure on U.S. President Trump as political noise rather than a game-changer for investors.

As Trump himself tours the Middle East before heading to Europe for the NATO and G7 summits later in the week, the drip-drip of stories about links between his administration and Russia keeps the tension high in Washington. Banks such as JPMorgan reckon a U.S. political hiatus that takes all hope of tax cuts and new spending off the policy table could see short-term stock market downside of as much as 5 percent. But they also reckon the slow and stable underlying economic expansion can continue regardless and support a relatively quick rebound in equity and the dollar. What’s more, JPM reckons the dollar is already about 5 percent too cheap against the euro relative to fundamentals.

So, despite Wall St equities rallying almost 0.7 percent on Friday, euro/dollar kept gunning higher to 6-month highs above $1.12 – even though it’s lost that level again early on Monday. Data from the CFTC, meantime, show net positions in favour of the euro rose last week to three-year highs. 

Asia markets benefited from the combination of Wall St resilience, the return of the ViX implied volatility gauge back as low as 12 percent and the ongoing weakness of the dollar.

While Shanghai stocks underperformed due to persistent regulatory concerns there, HK was up almost 1 percent, Tokyo’s Nikkei225 was up 0.5 percent and MSCI’s broader index of Asian equity outside Japan posted its biggest daily rise in a month.  Ten-year U.S. Treasury yields firmer above 2.25 percent, while Brent crude hover just below $54 as markets awaited an OPEC supply cut extension at its meeting in Vienna on Thursday.  

Eurostocks are expected to open about 0.5 percent higher. As weekend opinion polls show a narrowing of the UK ruling conservative party’s lead ahead of the June 8 general election, sterling is struggling to hold $1.30 and has weakened a touch against the euro too.

Spanish bond yields crept up on Monday after the country’s Socialists chose a hardliner to head the party again, a move which could make the conservative government’s minority rule more fragile. Greece debt prices were steady as the euro group finance ministers meet in Brussels to discuss the country’s latest bailout and a possible compromise with the International Monetary Fund over future debt relief in exchange for Athens’ budget control measures.

(Editing by Andrew Heavens)


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