Greece: No News is Not Good News

No significant news hit the markets regarding Greece over the weekend. Capital markets continue to witness the dealings of Greece acting like a petulant child being scolded by its guardian. The more the parent pushes, the more obstinate the youngling becomes. No progress is bad news given that Greek sovereign debt remains on a downward trajectory, and Athens is getting closer to running out of cash.

In reality, there is still a complete lack of apparent progress with respect to Greece and its creditors reaching any sort of agreement. The next scheduled Eurogroup meeting is on May 11. Reports are circulating that the deadline for a Greek agreement could be extended until May 25. This would give the Greek government approximately five weeks to ratify, just before the late June final deadline.

The obvious reason why investors have not panicked to date is that the European Central Bank’s quantitative easing program is providing a considerable boost. Nevertheless, despite the rest of Europe willing to reach a deal to deliver much needed funding for Greece, whispers of a ‘plan B’ are beginning to circulate. The latest from Athens, meanwhile, sees over +70% of the population leaning in favor of a debt agreement with the European Union, and only +23% indicating that they were prepared to leave the eurozone. The ball is in Greece’s corner, however, the rest of Europe is quickly losing patience.

Data, Central Banks in the Spotlight

There are a number of macro indicators to watch out for this week: U.S. first-quarter gross domestic product on Wednesday, the Institute for Supply Management’s manufacturing index and China’s purchasing managers’ index on Friday. Critical data out of Japan is also due including a consumer-price index (CPI), unemployment figures, consumer spending and industrial output for March will all be reported. And price data — including the April flash harmonized index of consumer prices — ranks high in importance for the eurozone given its recent the flirtation with deflation.

It’s also a busy week on the central bank front led by the Federal Open Market Committee (FOMC), although the Bank of Japan, the Central Bank of Brazil, and the Central Bank of Russia will also announce policy decisions. Later this evening, investors will take their cue from the Reserve Bank of Australia Governor Glenn Stevens. The governor is due to speak at the Australian Financial Review Banking and Wealth Summit in Sydney. Expect the market to pay close attention to his comments, the first since the release of Australia’s first-quarter CPI last week. His testimony is considered particularly critical, since the fixed-income market is nearly evenly split (+56% versus +44%) on the probability of another rate cut next week. The governor and his fellow cohorts remain vocal on how overvalued the AUD has been (AUD$0.7815). Over the last couple of trading sessions, commodity- and interest rate-sensitive currencies have found some relief. Aussie bulls should be cautious.

FOMC Is the Main Event

Nevertheless, it’s the Federal Reserve that will be keeping capital markets on its toes, and the main reason why there are few strong moves ahead of the FOMC outcome.

On Wednesday, U.S. policymakers are expected to convey the message that first-quarter data was an aberration, and that they see growth proceeding at a ‘moderate’ pace. A year on, the dynamics are a tad different for the Fed. Last year, economic activity had already started to pick up after a harsh winter. Recent retail sales and employment data continue to show signs of weakness, and that’s the reason why the USD has been underperforming of late — investors have been pushing the timing of the first rate hike further out the curve. June had been the forerunner for the first rate hike, but most fixed-income dealers are looking now to the end of the year, or even the beginning of next for the Fed to begin its rate normalization process.

Forex Unfazed with U.K. Elections

Of late, sterling has been quietly bid, dumbfounding the bears and confusing the markets. The Greek fiasco has obviously lent support to the pound (£1.5126), probably more than the market had been expecting. The U.K. election is less than two weeks away and it continues to be widely seen as unpredictable. Nevertheless, the forex market is currently unfazed about the political outcome.

The event risk is that the situation could change very quickly, just like last September’s Scottish referendum. The vote was nearly upon us before the markets woke up to the potential risks. Looking at two-week forward vols (volatility), they are trading at +10.1%, which suggests that the market does not expect election related uncertainty to persist. The danger is that the market does not seem to be pricing in a hung parliament or even the probability of a second general election. Investors should be wary that it’s too quiet on the sterling front.

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