Talks between the socialist Greek government and its creditors, which were billed as the last chance for Greece to get additional bailout assistance before a €1.6 billion loan payment came due, collapsed in less than an hour Sunday.
European stock markets were hit hard by the news, with banking stocks leading the way down. At 10am in New York, the Dow was down 150 points, and the Nasdaq was below 5,000, down over 1%.
The dollar was up modestly on weakness in the euro, back to slightly over 95 points against a basket of currencies. German bunds and U.S. Treasuries are gaining, with the deb of the troubled Mediterranean nations being hit over fears of financial contagion if Greece defaults.
Gold is unchanged at $1,181, while silver is up 4 cents to regain the $16 mark. Platinum is down over 1%, to trade at $1,082. Oil futures were down over 2%, with WTI below $59 a barrel.
Yesterday in the Markets
Gold fell Friday morning on the PPI report in the U.S., but regained its footing to close down less than $1 an ounce. Silver lost 7 cents to close at $15.96. Saudi Arabia, eager to finish driving a stake into the heart of the U.S. shale drilling industry, announced plans to increase production. This sent oil down for a second day. The dollar closed flat, ending at 94.97 on the DXY index.
The DJIA lost 140 points Friday, to close back under 18,000. The S&P 500 lost .7% Friday, to erase weekly gains. The Nasdaq was down .6% to close the week in the red. Worries over an early Fed rate hike and a Greek default weighed on markets.
German bunds saw safe haven activity Friday, with the yield on the 10-year note dropping 5 basis points to 0.83%. The 10-year Treasury note in the U.S. was basically unchanged, gaining 1 basis point.
Factors Affecting Gold Today
Greece brought no new plans to the negotiating table Sunday, and talks collapsed after less than an hour. Leftist prime minister Alexi Tsipras immediately hit the airwaves, calling creditors demands for cuts against the lavish Greek pension system and wages for government workers an assault on democracy, and demanded that they “get realistic.” European Commission spokeswoman Annika Breidthardt called Tsipras’s version of events “a gross misrepresentation” of the facts, and Volker Kauder, parliamentary floor leader of Chancellor Angela Merkel’s conservatives, said “It won’t work that Greece sets the terms and says ‘everyone has to dance to our tune’. Greece needs to get back to reality,” Instead of being available to talks over his nation’s looming default, Tsipras will be spending four days in Russia as the guest of President Vladimir Putin, another ploy to pressure creditors into capitulating to Greek demands.
The far-left ruling Syriza coalition in Greece won power by promising the public it would roll back bailout terms agreed to by the previous administration, and still keep the bailout money flowing. Creditors have given ground on many Greek demands, but refuse to allow Tsipras to put government salaries and pensions off-limits. Pensions and government salaries account for 80% of Greece’s national budget, which is an unsustainable level.
High-yield corporate bonds are taking a beating, as time nears for a Fed rate hike. This will raise yields on government and investment-grade bonds, making the return on junk bonds not worth the extra risk. Amid the worries about liquidity in the junk bond market, the question should perhaps be “who cares how fast you can sell it, if it won’t be paid back?”
In addition to the final act(?) of the Greek tragedy, the Federal Reserve Open Market Committee (FOMC) meets tomorrow and Wednesday, with a press conference by Chair Janet Yellen afterwards. No one is really expecting a rate hike before September at the earliest, but markets will be jittery just the same.
With the collapse in bailout negotiations for Greece, the odds increase that 2/3 of the board of directors of the European Central Bank will vote to stop replacing money being pulled out of Greek banks by nervous citizens, to cut losses to the taxpayers in the rest of Europe.
Economic reports due Tuesday include new housing starts in the U.S., consumer prices in the UK and Germany, and the ZEW business sentiment survey in Germany.