Market Bulletin (20/07/2015)
Back from the brink
In a series of about-turns, the principal players in the Greek debt drama have reversed their positions to facilitate a deal. Even so, few believe that the problem has been solved once and for all.
After some brinkmanship on both sides at the start of last week, Prime Minister Alexis Tsipras upset his Syriza partners by accepting a tough reform programme in return for a new €86 billion bailout. He spoke of having had a knife at his throat. In spite of his colleagues’ lack of support, opposition parties backed him in parliament, which accepted the deal by 229 votes to 64. European Union officials have subsequently lined up €7 billion in bridge financing to prevent default on a loan due this week. The European Central Bank raised its limit on emergency loans to Greek banks, which reopened today for the first time in three weeks. “The ECB continues to act on the assumption that Greece is and will remain a member of the euro area,” said Mario Draghi, its president. Greek capital controls will remain in place.
Then it was the turn of Germany’s Bundestag, whose say-so was required for rescue plan negotiations to continue. On Thursday, the Greek parliament passed a series of reforms (including VAT rises) which had been demanded as a precondition of the bailout. On Friday the Bundestag voted to press on with a deal by an overwhelming majority, despite the German finance minister Wolfgang Schäuble saying Grexit would be a better solution.
The International Monetary Fund (IMF), which had previously taken a hard line with Greece, said that no rescue plan could be sustainable without substantial debt relief. Debt forgiveness will not find favour with some northern European eurozone members, however, not to mention the former Communist states. And while Greek politicians may vote for reforms, there is some scepticism over the extent to which these will actually be implemented. This story is far from over.
Even so, European stocks took heart from these developments, and the FTSEurofirst 300 Index enjoyed a run of positive sessions, ending the week 4.2% ahead. US stocks also had a strong week. Investors were encouraged by progress on Greece and a more stable Chinese stock market. A healthy corporate quarterly results season contributed to the revival in risk appetite, with encouraging figures from the likes of Google, General Electric and Honeywell.
The dollar strengthened as the week unfolded, rising nearly 3% against the euro, to $1.08. It was helped by positive Consumer Price Index inflation figures for the fifth month in a row. That supported the case for an early hike in US interest rates, as did a 9.8% surge in June housing starts. Consumer confidence dipped slightly in June, perhaps because of a slight rise in petrol prices. Nonetheless, Federal Reserve chairman Janet Yellen told a Congressional committee that the Fed “expects US GDP growth to strengthen over the remainder of this year and the unemployment rate to decline gradually”. She added that it still expected to begin raising rates gradually this year, as long as the economy continued to improve. The S&P 500 was up 2.4% over the course of the week, its biggest weekly gain for four months. The NASDAQ Composite Index, which is more biased towards technology stocks, ended the week on a record high after Google posted impressive second-quarter results.
The week’s big geopolitical news was an agreement, at last, between Iran and six world powers – the UK, US, Russia, France, China and Germany. Tehran has promised to rein in its nuclear ambitions in return for the removal of sanctions. Since this means Iran will resume supplying oil to world markets, the oil price was quick to respond, with Brent crude falling 2.1% to $56.66 a barrel.
As the Vienna talks had progressed and markets envisioned a worsening of the existing oversupply situation, oil prices declined some 11% over the month and the oil futures market doesn’t think that they will improve any time soon. The price of West Texas Intermediate crude for delivery in December 2016 is now less than $60 a barrel, the lowest it has ever been. As its oil revenues have fallen, Saudi Arabia has borrowed $4 billion in local bond markets this year, its first bond issues for eight years.
Demand for gold has been similarly muted, and the price of the precious metal ended the week at $1,132 an ounce, its lowest close since April 2010. Conditions for gold bugs are not exactly propitious. A stronger dollar is usually bad for gold. And since the metal is generally seen as a hedge against inflation, the fact that inflation is low, or non-existent, around the world is not helpful. It has a role as a safe haven when crisis strikes, but neither the prospect of Grexit nor the recent Chinese stock market plunge prompted much buying. Commentators say that gold likes to take the escalator up but the elevator down, gradually creeping higher before taking a fall, and some are now looking at $1,000/oz as the next stop.
We now know that China has been a big buyer of gold, at least over the past six years. That’s how long it has been since it last revealed the size of its gold holdings. The Chinese central bank announced that its gold reserves had grown by nearly 60% since 2009, to 1,658 tonnes. It has overtaken Russia as the world’s sixth-largest holder of gold, after the US, Germany, the IMF, Italy and France.
Chinese GDP grew slightly faster than expected in the second quarter, with a 7% year-on-year increase, the same as in the first quarter. Net exports were an important contributor, not because exports themselves were strong but because imports – thanks to low commodity prices – were weak. “So while China has defied the sceptics for now, we do not see much in the data to encourage us about the economy’s future,” said Craig Botham, emerging markets economist at Schroders.
On Friday, the Shanghai Stock Exchange Composite Index rallied 3.5%, leaving it slightly up on the week. The hope is that strenuous official attempts to prop up the market are finally working, after it lost one-third of its value in three weeks. It was revealed that the big state-owned banks have lent the equivalent of $209 billion to fund share purchases.
UK rate rise?
UK inflation returned to zero in June, down from a very modest 0.1% in May. The fall, such as it was, reflected deeper discounting in the clothing sector and a slightly accelerated decline in food prices. Capital Economics reckoned that the UK was set for another brief period of deflation, possibly starting this month, and that inflation would remain below its 2% target throughout the next two years. However, there were still “no signs that low inflation reflects a more general economic malaise”, the economics consultancy said.
The UK’s unemployment rate in the three months to May rose to 5.6% and employment dropped by 67,000, its first fall in two years. Perversely, average earnings rose by 3.2%. Economists suggested that the figures could be explained by rising productivity. Job losses and low inflation have not stopped the Bank of England from thinking more intently about the next rise in interest rates – which would be the first since July 2007. Speaking at Lincoln Cathedral, Bank governor Mark Carney indicated that the present 0.5% rate could start to rise “at the turn of this year” and could, by gradual increments, reach 2% over the next three years.
The hope of savers that deposit rates will begin to edge back up to pre-crisis levels still appears a distant one.
Schroders is a fund manager for St. James’s Place.
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