Talks Hit a Speed Bump as Greek Proposal Rejected

U.S. indices are expected to open lower on Wednesday, tracking losses in Europe where negotiations between Greece and its creditors hit another speed bump. Investors in the U.S. will also eye the latest first quarter GDP revision for signs that output in the first quarter was not as bad as feared.

Just as we thought we were seeing significant progress being made in talks between Greece and its creditors, a Greek government official has claimed the latest proposal has been rejected by creditors raising questions once again around whether a deal will be possible. There were already doubts about whether the deal put forward by Greek Prime Minister Alexis Tsipras on Sunday would pass through the country’s parliament even if it was accepted by the institutions. This has just thrown another large spanner in the works.

It has already been suggested that in bowing to some of the demands of the creditors, Tsipras has lost the support of some of his left wing party which means he may have already relied on opposition members to get any deal through parliament. The more they push him today, the more support he could lose on any deal that is eventually agreed by finance ministers tonight. Talks may have taken a couple of steps forward at the start of the week but as we’ve become accustomed to, this has been followed by another step back.

There is still clearly some form of progress being made, we saw that at the start of the week when creditors welcomed the new Greek proposal. The gap between the two is obviously closing. Unfortunately, with the deal now being rejected and a counter-proposal sent back, Tsipras will have to compromise a little further or risk negotiations collapsing once again. The difference now being that time is fast running out and Greece is on course to default to the International Monetary Fund in six days. The only way they could get an extension now is if the IMF offered a month-long grace period which they recently claimed would not happen.

Tsipras is now faced with a very tough choice and there appears to be no outcome which appeals the Greek people, his Syriza party and the creditors. Tsipras is going to have to make sacrifices one way or another and unfortunately for him his political future looks bleak if a deal is going to be reached. If party members are already turning their back on him then whatever deal is agreed will not satisfy them. Tsipras is likely to rely on the support of other parties, which may be easier than convincing certain members of his own.

With Greek talks possibly coming to a conclusion (for now), attention will likely shift back to the U.S. and when the Federal Reserve will hike interest rates. September looks increasingly likely after the recent rebound in wages and consumer spending but we saw recently that investors are beginning to look beyond just the first hike. The Fed’s insistence that future hikes will be slower than normal was seen as being quite dovish by investors even though the first may only be a few months away. We saw a similar response when we were approaching the decision to taper and focus shifted to interest rates.

While growth in the first quarter is old news at this stage, if the data shows it was not as bad as thought, it could encourage the Fed to hike. There were numerous headwinds facing the US economy in the first quarter and if it managed a small amount of growth, or even marginal contraction, that would show a strong resilience in the economy. We’re expecting the figure to be revised up to -0.2% on an annualized basis.

The S&P is expected to open 5 points lower, the Dow 54 points lower and the Nasdaq 11 points lower.

For a look at all of today’s economic events, check out our economic calendar.

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