- Investors keeping tabs on intraday price moves
- EUR emerges again as a funding currency
- Euro leads want a Greek conclusion by tonight
- Germany losing economic momentum
If nothing else, investors would be hard pressed not to find the current trading environment a challenge. Only weeks ago central banks forewarned investors about heightened market volatility and they have been true to their word. Market ranges may be contained, but the intraday price movements among the various asset classes — commodities, equities, fixed income and currencies — have either been very profitable or costly to many.
Central banks have been calming investors for the past seven years with low interest rates, bond buying, and other interventions aimed at shoring up weak economies. Going forward, monetary policymakers are slowly beginning to step out of markets in a variety of ways. This mix of overt and subtle withdrawal of market support is a key macro driver of recent increased volatility. To date, the markets have been at risk of becoming distorted and overly reliant on policymakers for direction. Central bankers are herding the investor back to basics and forcing them to be more data dependent.
Euro’s Appeal Begins to Grow
Despite the Grexit event risk on display, U.S. markets have begun this week largely looking past Greece and refocusing on U.S. data and rate expectations. Already the USD has rebounded as interest rates back up. For many, the single unit’s move lower (€1.1200) over the past 24 hours has been more puzzling than anything. The market had expected that a reduction in Greek risk would be a positive for the common currency. However, the EUR’s intraday moves, although not obvious, seem indifferent to the Greek talks.
It appears that the easing of tension between Greece and its European creditors is giving speculators the confidence to take on more risk, pushing the USD to build upon recent gains against the majors and commodity-related pairs. The optimism on Greece seems to be bringing the focus back on the Federal Reserve and its first potential rate hike. Once a Grexit finally gets pushed off the table, investors should be expecting the EUR’s role as a funding currency to take flight again with investors turning back to U.S. economic fundamentals for directional guidance.
That being said, the Greek saga needs to come to a conclusion. European leaders want today’s negotiations between Greece to conclude at today’s Eurogroup meeting. They do not expect it to spill over into tomorrow’s leaders summit. This would suggest that capital markets might not get a clear picture on how things are progressing for sometime, as negotiations could go on all night. If this is the case, it could make for a long day for many traders.
A Tough Sell for Greek Prime Minister
Assuming that everything goes well at today’s Eurogroup meeting and tomorrow’s Leaders Summit in Brussels, then everything is handed over to the Greek and German parliaments for approval. For Greece, voting could occur over the weekend and once completed, then the German parliament will be presented with an extension of the Greek bailout program. The Germans could vote on June 29.
However, even if Greek Prime Minister Alexis Tsipras succeeds in forging an agreement with the cash-strapped nation’s international creditors, his problems are only beginning, as its Greece’s domestic politics may prove to be the bigger stumbling block. The prime minister has always been under pressure to come to a deal close to his agenda, but due to the urgency of the situation he has had to conform, and this has never stood well with the more radical element of the governing coalition. If Tsipras thought it was a tough sell in Europe, it’s perhaps an even tougher sell domestically.
There are many moving parts to this ongoing saga, and assuming things do progress to the ratification stage by the weekend, the markets should be expecting heightened volatility as we also complete quarter and half-year-end in capital markets.
German Business Confidence Disappoints
At this very moment the European markets are finding it difficult to buy into fundamental data points as they are fixated and focused on Greece. The EUR made a weak attempt to trade ahead of this morning’s German Ifo business climate numbers. Pre-release trading pushed the unit to its intraday high (€1.1227), but the headline release did not live up to expectations and has since been weighing on the single currency. German business confidence fell sharply last month, and by more than expected (107.4 versus 108.5). It’s the lowest headline print in four months.
The headline print would suggest that the outlook for the German economy is “muted.” Year-to-date, the index has been pointing to solid economic growth for the country, and today’s number indicates that it may be losing some of that momentum. Other German data has been producing mixed signals: Germany’s ZEW’s economic expectations slumped to a seven-month low, and yesterday’s German purchasing managers’ index was an upbeat surprise.
Nonetheless, German data adds to the notion that the European Central Bank’s quantitative easing program is expected to be maintained at the current pace and run at least until September 2016. This will provide fodder for the EUR bear, especially on any single currency rallies.