Final Countdown for Greece?: Morning Market Update June 12

June 12th, 2015 by

The growing likelihood of a sovereign default by Greece is weighing on global markets, as positions harden on either side of the table.

Wall St. opened lower, after closing with slight gains yesterday. European stocks are down, as is the euro common currency. German and U.S. bonds are seeing slight safe haven demand, and the pressure on the euro has the dollar slightly higher.

Gold was initially down on wholesale prices gaining in the U.S., but saw a small spike upward to unchanged on safe haven demand after hitting oversold levels. Other precious metals are modestly lower.

Yesterday in the Markets

Strong retail sales numbers in the U.S. fueled a second day of gains on Wall St., but the rally was curtailed drastically on news at 10:30 am that the IMF negotiating team in Brussels had left the Greeks at the table in frustration, and had flown back to Washington. Shares in New York ended with only slight gains.

bondsBonds finally got some love on Thursday, after the sale of Treasuries was well-attended. This gave Treasuries and German bunds a boost, with yields dropping from recent highs. Oil futures fell around 1%, while the euro eased and the dollar gained.

Spot gold recovered from early pressure to end at $1,182, down $3.60. Silver only lost 2 cents an ounce, to close at $16.03. Platinum was down .6% while palladium was flat.

Factors Affecting Gold Today

Wholesale prices in the U.S. jumped 0.5% in May, compared to -0.4% in April, due to the recent rise in oil prices. It was the largest one-month gain in two and a half years (but only brought prices back to the level they were in March.) Prices year-to-year declined 1.1%, since oil prices were near $100 last year.

plan cThe big news is of course, time running out for Greece.  Tempers are flaring among Greece’s EU creditors as public opinion in the Eurozone hardens against more taxpayer money going towards another bailout of the troubled country. A poll of 1,230 voters released today shows Germans split on whether Greece should be kicked out of the EU or not, with 51% saying they should be cut loose, 41% wanting them to stay, and 8% undecided. 65% saw little to no economic harm to Germany if Greece left the EU. When the question is turned towards additional concessions made to Greece over its bailout, a whopping 70% were against weakening the bailout terms any more than they have been.

European officials have essentially given Greece less than 24 hours to come up with real, concrete numbers for alternatives to current bailout terms, or agree to the existing terms. Benchmark 10-year Italian, Spanish and Portuguese bonds saw yields nudge up between 8 and 11 basis points today, as investors moved into the traditional safety of German Bunds. Greek 10-year bond yields rose 25 basis points to 11.6%

Chief Global Economist of UniCredit Erik Nielsen said that “People are really fed up with this. They’ve never seen anything so completely ridiculous, frankly speaking, from a debtor country.” On the possibility that Greece could set up its own currency, Nielsen described the socialist government as being unable to plan a barbeque, much less a currency. With no public trust or even a printing press for banknotes, it would be impossible to accomplish, he said.

EU officials are publicly talking about “Plan B,” contingencies for a Greek default.

tragedyAfter the IMF team walked out of discussions with Greek negotiators, citing their unwillingness to bargain in good faith, the socialist government in Athens accused the IMF of using pressure tactics. Though the nation is bankrupt and the economy is collapsing, the prideful Greeks are fighting against what they feel is disrespect from its creditors. Even though other European nations have successfully gone through the bailout regime (Ireland’s credit rating is already back to A+,) the Greeks see how much more the creditors could give up, and feel insulted that they won’t. The ruling ultra-left Syriza party, which campaigned and was elected on promises to end the bailout terms, but keep the bailout money coming into the country, aim to do just that.

Their trump card has nothing to do with economics, and everything to do with using their geopolitical position to extort easier terms from the EU. Greek prime minister is set to travel to Russia for a second time in as many months, where Putin has already pledged financial support in building a natural gas pipeline through Greece to bypass Ukraine.

The IMF said that the Greek pension system was unsustainable, with state spending on pensions accounting for 10pc of GDP, compared with 2pc across the EU as a whole. However, the Syriza ruling party in Greece has made pensions sacrosanct, even planning to roll back cuts made by the previous administration. The problem with the Greek pension program is that there is no other safety net for Greeks thrown out of their jobs, other than taking early retirement. So, the pension rolls are swollen by tens of thousands of people who otherwise would be working, and contributing taxes toward the fund.

looking-aheadLooking Ahead

While everyone prays for a solution to the Greek Problem, next week will be the latest Federal Reserve Open Market Committee meeting. With so much good economic news coming in, Janet Yellen could conceivably even announce the first rate hike since 2006 by July.

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