Has Greece come to the end of its Euro participation ?

 

Schwaben small S              Schwaben Blog

 

July 06, 2015

 

Weekly Statistics:

 

 

Today

Week Ago Year Ago
  06-July-15 26-June-15

06-July-14

       
S&P TSX

14,593

14,808

15,172

S&P 500

2,069

2,101

 1,977

DJIA

17,683

17,947

17,024

OIL

$52.78

$59.65

 $96.02

USD vs CAD

0.7905

0.8116

0.9370

Gold

$1,169

$1,174

 $1,320

 

In a historic outcome, the Greeks have overwhelmingly rejected the conditions of a rescue package from their creditors on Sunday. The Greeks were supposed to vote a ‘Yes’ or a ‘No’ on whether to accept their creditors’ conditions of pension cuts and tax increases, and continue being a part of Eurozone or reject their conditions and risk their country’s membership of Eurozone or even European Union.  61% of the Greek population voted ‘No’. Greece has now become the first developed economy to default on its international obligations and it is by far the largest default International Monetary Fund (IMF) has ever faced. The Greek economy is already facing acute crisis with national banks imposing a daily ATM withdrawal limit of 60 Euros and unemployment topping 20 percent.

This default does not necessarily mean that the Greece will be thrown out of the single currency Eurozone however will increase the risk that Greece will turn into a economic and financial tailspin that will force it to revert to a newly created Drachma. Tsipras came to power in January riding high on the promises of ending austerity measures and redefining the Greek economy. So far the economy has not shown any substantial progress and improvement. Although Greece does not play a major role in international trade, its debt default can lead to fear that the default may spread into the other troubled European countries (PIIGS) like Portugal, Italy, Ireland, Greece or Spain. and as a result could cause significantly raise their cost of borrowing. While this scenario is unlikely, in order to contain this contagion, German Chancellor, Angela Merkel, and French President, Francois Hollande met in Paris on Monday.  The image below compares the exposures of different countries to the Greek economy in 2010 to 2014 with Germany, Italy and Spain being the largest creditors to Greece. While Germany’s economy can withstand the default of the Greek economy, it will be the Italy and the Spain, which could face trouble as their economies are already under pressure.

Soverign and Bank lending

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Grexit in Europe versus US growth in North America

 

Schwaben small S    Schwaben Blog

 

June 26, 2015

 

Weekly Statistics:

 

Today Week Ago Year Ago
  26-June-15 19-June-15

26-June-14

       
S&P TSX

14,808

14,653

15,146

S&P 500

2,101

2,110

 1,960

DJIA

17,947

18,014

16,851

OIL

$59.65

$59.51

 $96.43

USD vs CAD

0.8116

0.8140

0.9370

Gold

$1,174

$1,200

 $1,323

An upbeat New Homes sales report for the United States showed further strength of the US economy. Sales of newly built homes rose in May to 546,000 from 534,000 in April. It is the highest level since February 2008 and a solid indicator of a strengthening US housing market. Although this number is still far from the July 2005 peak of 1.4 million (annualized), but the increase in demand shows that builders will ramp up construction this year which would likely strengthen the broader economy.. Americans also boosted their consumer spending at the fastest rate in almost six years. This increase came amid lowest jobless claims in 15 years. All these indicators will help the Federal Reserve decide when to raise the interest rates. These indicators also clearly show that the US economy is set to grow at a decent pace after a dismal performance in the first quarter, which many analysts believe was due to the harsh winter and the strike at the western ports. Although the positive indicators were supposed to help equity markets, the uncertainty of a Greek debt default still kept the investors anxious. After the meeting of the Eurozone’s finance ministers on Saturday, the ministers rejected a Greek request for a one month extension to its bailout. Subsequent to receiving continuous bailouts for the last five years from the European Central Bank (ECB) and the International Monetary Fund (IMF), Greece is finally set to default on its payment of EUR 1.5 Billion to the IMF on Tuesday. The decision not to extend Greece’s bailout came after Athens rejected the policy overhauls and budget cuts demanded by its creditors. At this time, when the US is preparing for an interest rate increase after almost 9 years, the Greek debt default could severely impact the growth prospects of the Eurozone and also plunge other countries like Portugal, Cyprus and other fragile European countries into a recession. The default may also spread fear among North American investors, which could hurt North American equity markets.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

Greece getting closer to the edge – what after ?

 Schwaben small S          Schwaben Blog

 

June 05, 2015

 

Weekly Statistics:

 

 

Today

Week Ago Year Ago
  12-June-15 05-June-15

12-June-14

       
S&P TSX

14,742

14,957

14,909

S&P 500

2,094

2,092

 1,930

DJIA

17,899

17,849

16,734

OIL

$59.98

$58.42

 $95.30

USD vs CAD

0.8123

0.8017

0.9210

Gold

$1,181

$1,172

 $1,276

 

The University of Michigan posted a better than expected number for the United States consumer sentiment at 94.6, but major equity indices were under pressure by fear of Greece’s possible debt default. For the first time, senior political leaders of European Union discussed a possible Greek debt default as negotiations between Athens and its creditors stalled ahead of an end of the month repayment deadline. With unemployment hovering around 26 percent, Greece’s situation is deteriorating every month. Greece currently owes $352.7 Billion to foreign investors. About 75 percent of that debt is owned by European Central Bank (ECB) and International Monetary Fund (IMF). While German Chancellor Angela Merkel has repeatedly said that she will keep working to allow Greece to stay in the Eurozone, the German Finance Minister, Wolfgang Schaeuble, is willing to let Greece exit the Eurozone unless its government takes measures to ensure the country’s long-term survival in European Union.  If Greece defaults on its debt, then other smaller economies in Europe like Italy, Cyprus and Spain could face troubles as well. Eurozone is already facing negative or muted growth and many countries are experiencing unusually high double digit unemployment rates . At a time when ECB is actively trying to fend off the deflation in the Eurozone by introducing 1 Trillion Euro bond buying program, a default by Greece would be a major setback and could possibly lead many countries in the Eurozone into recession. In equity markets, sentiment plays a big role in the direction of movement of markets. Impressive growth in the US economy and a growing Chinese economy has instilled a sense of false confidence or a bubble among investors, however with a Greek debt default on the horizon, fear could quickly spread to global markets. Although Greece is not a significant economy and does not play a major role in global trade, its default could have disturbing effects across Europe and North America.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

Markets stronger than expected before weekend

   Schwaben very small S                                         Schwaben Blog

 

May 8, 2015

 

 

Weekly Statistics:

Today

Week Ago Year Ago
08-May-15 01-May-15

09-May-14

S&P TSX

15,170

15,339

14,534

S&P 500

2,116

2,108

 1,878

DJIA

18,191

18,024

16,583

OIL

$59.45

$59.26

 $91.07

USD vs CAD

0.8265

0.8222

0.9072

Gold

$1,188

$1,177

 $1,304

On Friday morning European markets surged about 2.5% on the conservative victory in England starting markets on a good note that continued in North America after the job market in US has rebounded on employment gains for the month of March. The employers added 223,000 new positions in April compared to a gain of 85,000 in March (initially reported as 126,000). Economists were expecting a gain for 224,000. The majority  of gains came from professional and business services (added 62,000 jobs), health care (added 45,000 jobs) and construction (added 45,000). The average hourly earnings for employees rose by 0.1% and have now grown by 2.2% in the last twelve months. This was below the economist’s estimate of 0.2%. The unemployment rate moved down to 5.4% and is closer to Fed’s expectation of “full employment”, which it pegs around 5.2%. This is the lowest unemployment rate since 2008. Michael Dolega, senior economist at TD Economics, said “The report was more or less a Goldilocks one, healthy enough to assuage fears that an abrupt slowdown in the US economy is upon us, but not strong enough to bring forward the Fed hike meaningfully”. The labor participation rate remained virtually unchanged at 62.8%, up 0.1% from participation rate. Over the last twelve months, it has stayed within a range of 62.7% and 62.9%, still near the lowest level since the late 1970s. Many economists now think that the first-quarter woes were temporary and the economy will rebound this spring, as it did last year from a first-quarter contraction. While the increasing gains in job numbers point towards the strengthening US economy but the slow growth in hourly wages paints a different picture. This absence of wage pressure will keep the Fed from raising the rates in June and it led to a rally in equity markets with all the major indices up more than 1%. While the Fed may not hike interest rates in June, a September rate hike is still on the table and this will be the first rate hike since 2006.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch

Is China finally driving Global Capital Markets ?

    Schwaben Blog

 

April 17, 2015

 

 

Weekly Statistics:

Today

Week Ago Year Ago
10-Apr-15 02-Apr-15

17-Apr-14

S&P TSX

15,360

15,388

14,500

S&P 500

2,081

2,102

 1,864

DJIA

17,826

18,057

16,408

OIL

$56.14

$51.70

 $93.09

USD vs CAD

0.8178

0.7946

0.9072

Gold

$1,203

$1,208

 $1,296

Global markets saw a selloff on Friday, driven by concerns over Greek’s possible exit from Euro, crackdown on margin lending in China and subpar US corporate earnings. Yields on 10-year German government bonds hit a record low of 0.07% as investors tried to move from equities to bonds. This led to a fall in European markets with Germany’s DAX loosing 2.6% and France’s CAC 40 loosing 1.6%. According to major strategists in Europe, Greece is making little progress in negotiating its debt with it’s international creditors and that could lead it to defaulting on its debt or even exiting the euro.  Athens’ main stock exchange lost around 2.5% and has declined more than 40% over the last 12 months, making it one of the world’s worst performing indices. Greece needs to pay its civil employees and pensioners at the end of this month and as the date comes closer they are tapping all the remaining cash reserves across the public sector (pension funds and regional administrations)- a total of $2 Billion Euros.  A senior Greek finance ministry official said that ” This is the last bit of cash that Greek state has”. Greece’s remaining time with euro could be decided on Saturday during their meeting with their lenders.

The Chinese securities regulator warned against excessive borrowing in Chinese markets and imposed sanctions on margin borrowing in order to control margin trading. This led to a 5%decline of  Chinese equity markets in post-close trading, which further brought the negative sentiment to Europe and North America. Margin borrowing has been a major driver of China’s stock market run and Chinese shares have hit 7 year highs after seven weeks of gain. Their main index SCH COMP has almost doubled over the last 12 months and is up almost 70% this year. The Chinese regulator also allowed fund managers to lend stocks for short selling to increase the supply of shares. This led to a fear of sell-off among investors as Chinese markets have had an enormous run over the last 12 months. The world’s second largest economy has a significant impact over the global sentiment and if Chinese markets lost 5% then this could lead to a global sell-off next week.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch