It should be a very interesting week in the financial markets as Greece continues to try and negotiate a palatable bailout with its creditors, while in the U.S. the Federal Reserve will announce its latest monetary policy decision along with its latest economic projections.
These two events are so important for the markets and could trigger some huge moves in the markets this week. Greece may only be a small country but if a bailout deal cannot be agreed, it could be very damaging for the eurozone and the rippling effect would harm those countries outside of the region as well.
There has been very little progress in the negotiations for some time now and the deadline for Greece is fast approaching. It needs to repay €1.6 billion to the International Monetary Fund at the end of the month while another €1.5 billion is due in public sector wages and pensions and it is believed that it cannot do so without the bailout funds.
Greece’s Prime Minister Alexis Tsipras has suggested that he may be willing to compromise on some of the key sticking points if the country’s creditors agree to some form of debt relief, which could be seen as a sign that we’re finally going to see compromises being made. However, I cannot envisage Greece’s creditors agreeing to debt forgiveness while the country is still participating in a bailout. At most, they may commit to discussing it once Greece has completed the bailout and implemented all of the reforms demanded by the institutions in exchange for the bailout.
It is believed that Greece has until the eurogroup meeting on Thursday to agree on a deal or the risk of default grows enormously. It takes time for any deal to pass through parliaments and therefore any deal beyond 18 June meeting may delay payments being made to Greece to beyond the end of the month.
The other key event this week is the Fed meeting and while few people now anticipate a rate hike at Wednesday’s meeting, there could be big hints that it will come in September which could spark further volatility in the markets. Despite a slow start to the year, the data is improving and we’re now seeing rising wages and spending which is necessary if inflation is going to reach the Fed’s target within the forecasting period.
I think the projections will show this happening and the dot plot display further support for a September rate hike. This month’s decision will also be accompanied by a press conference with Chair Janet Yellen, during which she will be bombarded with questions from journalists trying to get any insight into when that first hike will come. I expect this to be a very closely followed event.
Today there isn’t too much due on the economic data front but we will hear from Mario Draghi who is due to testify before the European parliament’s Economic and Monetary Affairs Committee in Brussels. Draghi is likely to be pressed on the ECBs bond buying program, its effectiveness and lifespan as well as its ELA program and possibly at what point it will stop supporting Greek banks. This could make for interesting hearing given the volatility in bond markets recently driven by rising inflation and the impact on interest rate expectations.
The FTSE is expected to open 43 points lower, the CAC 30 points lower and the DAX 72 points lower.
For a look at all of today’s economic events, check out our economic calendar.