European Open – Greece and BoE Eyed As PBOC Cuts

European indices are set for a mixed start to the trading week as negotiations drag on between Greece and its creditors over the reforms needed to secure €7.2 billion in bailout funds. Meanwhile, the People’s Bank of China cut interest rates over the weekend by 25 basis points, to 5.1%, in a move that surprised no one and was actually smaller than some had anticipated.

While stock markets in China received a small boost from the rate cut, markets elsewhere appear rather unmoved by it. It’s the fifth time in six months that the PBOC has cut its benchmark interest rate of the reserve requirement ratio and further cuts are expected this year as the country experiences its slowest economic growth since early on in the financial crisis.

I think the disappointment stems from the fact that only a couple of weeks ago, the RRR was cut by a full percentage point which was quite a bold move. That move raised expectations for the following rate cut and those expectations haven’t really been met. Had we not seen a more than 5% correction in the Shanghai Composite last week, today’s gains may have even been far more muted.

Greece remains a big concern to European investors, with both the countries leaders and its creditors stalling on a deal as neither wants to make the big concessions needed to push a deal through. The Syriza party rose to power on the pledge to end austerity and it’s now fast realizing that this is impossible to achieve while remaining in its bailout program.

Today’s eurogroup meeting is unlikely to yield an agreement on the reforms needed to secure the funds so desperately needed by Greece in order to stay afloat. Given the lack of urgency coming from officials, we can only assume that Greece has managed to scrape enough cash together to make tomorrow’s €763 million payment to the International Monetary Fund.

Based on the recent comments from Eurogroup Chair Jeroen Dijsselbloem, who claimed that progress has been made but a deal is not close and will surely not be reached today, and Greek Finance Minister Yanis Varoufakis, that a deal will be reached in the next couple of weeks or so, it seems this saga is going to continue for some time yet. I do think a deal will be done eventually, the only questions that remain are whether Greece will receive a haircut on its debt, which is unlikely, Greek Prime Minister Alexis Tsipras will go back to Athens with his tail between his legs, or whether we’ll get a referendum in Greece on any proposed deal.

The Bank of England will announce its latest policy decision today and, as has been the case for a long time now, no change is expected. The view among many is that the Conservative majority that was voted in last week may delay any rate hike from the BoE as the rate of cuts will be potentially much greater which could act as a drag on the economy for the next couple of years. Given that the pound rallied following the result though, I’m not sure the wider market agrees. I think we will see significant cuts, but the economy is on a much better footing than when they came to power in 2010 and it may be able to absorb them much better than it did previously.

The FTSE is expected to open 3 points lower, the CAC 20 points lower and the DAX 15 points higher.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.