Last Chance for Greece?: Morning Market Update June 3

June 3rd, 2015 by

Leftist Greek prime minister Alexis Tsipras is flying to EC headquarters in Brussels today, to discuss what is billing billed in the press as the “final offer” by creditors to resolve the bailout crisis in Greece.

Bonds in the US and Germany are lower for the second day, as ECB president Mario Draghi warns markets in this morning’s address to “get used to higher volatility.”

An early morning dollar rally was snuffed out at 10am as the U.S. service sector recorded its slowest gain  in 13 months, and consumers kept their wallets in their pockets. The euro has resumed its mugging of the greenback, up another 1% against the dollar to well above 1.12.

Gold has given up some of the gains recorded yesterday, trading $2 below unchanged at $1,189.50. Crude oil is also consolidating this morning, after hitting highs for the year yesterday.

Yesterday in the Markets

The dollar fell throughout the day in New York, after hitting a 12.5-year high against the yen in Asia of 125 yen. This all changed when consumer inflation  in  the EU came in at a surprisingly strong +0.3%, sending the euro currency over 1.11 against the dollar.

Limited liquidity in the bond markets resulted in another spike in yields on government debt, as sellers greatly outnumbered buyers. Investors were shedding European bonds after the news of a recovering inflationary picture in the EU.

Stocks in the U.S. recovered from early losses by midday on better than expected auto sales, but the bond rout pulled utilities down, and the usual selloff in the last hour of trading had stocks finishing marginally in the red.

Crude oil prices hit a high for the year on a weaker dollar and prospects of economic recovery in Europe. WTI closed over $61 a barrel, and Brent closed right at $65.50.

Gold, silver, and platinum saw modest gains on Tuesday, while palladium lost ground.

On the Greek drama front, the Troika was polishing their “final offer” on concessions to the socialist government in Athens over bailout negotiations. Leftist prime minister Tsipras tried to preempt  the move by declaring “Greece is the one that submits proposals,” and offered yet another new budget plan.  Again, the Greek plan was rejected immediately as being incomplete and not going far enough. The chairman of the EC finance ministers council, Jeroen Dijsselbloem, said Tuesday that the time had come for Greece’s socialist government to be “honest” with voters, and admit that they would be unable to keep the drastic campaign promises made in January. “Sometimes you can win elections with too many promises and then you have to go back to your voters and say … in these circumstances we can’t deliver on them,” he said. “That is the message the Greek government must give its voters honestly.”

Factors Affecting Gold Today

The big news is coming from Europe, as Greek prime minister Tsipras heads to EC headquarters in Brussels to formally receive the rejection of his government’s latest plan to end austerity measures, but still receive bailout funds. He will be presented with the plan hammered out in a Monday night emergency meeting in Berlin between German chancellor Merkel, French president Hollande, IMF president Lagarde, and ECB president Draghi to prevent a Greek default.

This offer is being billed in the press as the “final offer” by creditors to Greece, and insiders say that the Troika has agreed to reduce the mandatory Greek primary budget surplus (used to pay back the bailout) from 3.5% to less than 1%. The catch is that the government has to get the budget surplus back up to 3.5% by 2018. The governing Syriza party in Greece has proposed cutting the budget surplus to 0.8% this year, and raising it to 1.5% next year, so the sides may be close to an agreement, despite threats to default on Friday’s €300 million payment to the IMF on Friday (speculation is that they could not make the payment if they wanted, as the money has dried up.)

Euros raining from the sky!

Euros raining from the sky!

On a happier note, ECB president Mario Draghi lauded the early results of the central bank’s quantitative easing program, saying that it will run its complete course to pull the EU out of deflation. Unemployment in the EU as a whole was reported to have improved slightly, to 11.1% from 11.2%. Unemployment levels of over 20% in southern Europe are still a drag to the overall economy of the area. Retail sales in the EU increased by .7%, another sign that recovery is on the way.

payrolls upIn the U.S., the ADP private sector payrolls report came in under expectations, but was still the best report in four months. 201,000 private sector jobs were added in May, but 192,000 (96%) of those jobs were so-called “McJobs” in the service sector. The previous month’s numbers were revised downward by 4,000 to 165,000.

The U.S. trade deficit shrank more than expected, by 19% as imports fell. Consumers are paying off debt and keeping their wallets in their pockets this spring. April’s trade deficit had hit a 7-year high, as exports were constrained by a dockworkers’ strike on the West Coast. The ISM non-manufacturing index, which measures the service sector, posted a 55.7 read, notably lower than the 57.8 read in April. This was the slowest increase in the U.S. service sector in 13 months.

 

looking-aheadLooking Ahead

Tomorrow, the most important economic reports will be first-time jobless claims and productivity in the U.S. News on the Greek crisis will be eagerly scanned by the markets as time runs out for Athens.

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