The saying goes seven days is a long time in politics, the past seven days has likewise seen a marked shift in sentiment for capital markets. This time last week investors were preparing for the unknown consequences of Greece leaving the euro, uncertainty with the commencement of the quarterly earnings season, and continued concerns over the Chinese economy. The week-ends on a much more optimistic note as the Greek people reluctantly agree to the demands from the rest of Europe, the latest Chinese economic data comes in slightly better than expected, and earnings season starts on a relatively positive note.
The question of Greece and the euro may have been addressed in the short term, however concerns remain this agreement may only take Greece away from the headlines for a brief time. There continues to be a great deal of scepticism that the Greeks will enforce the measures imposed on them, and even if they do whether this will be enough to bring the debt burden under control. The IMF strongly criticised the bailout deal offered to Greece believing that the debt burden remains highly unsustainable, and sees a need for a far greater level of debt relief. We get the sense that this week may not be the last in the saga of Greece and the euro. Wolfgang Munchau, writing in the FT this week, clearly highlighted a lot of the ongoing uncertainties that remain, and reiterating the view that by discussing a Grexit EU leaders have weakened the euro as a monetary union.
Janet Yellen on Wednesday made her bi-annual testimony on the US economy in front of the House Financial Services Committee. After a far weaker than expected retail sales number earlier in the day on Wednesday, the Fed chair expressed the view that the FOMC remains on track to raise rates this year if economy evolves as expected. That phrase would appear to leave a lot of room for manoeuvre, however one assumes the Federal Reserve are very keen to make the first upward move in rates since the 2008 crisis. Later today we get the monthly US inflation data, economists are not predicting any real pick up in the latest inflation rate. Assuming inflation again shows no real sign of an upward trend and economic data remains patchy, economists may start to again push out the date they expect that first move. US treasury yields after the sharp rise earlier in the year have stabilised, and bond markets remained little moved post Wednesday's testimony.
Merrill Lynch released its latest fund manager survey this week, once again it reported that fund managers hold higher than normal levels of cash in their portfolio's. This survey was taken after a 10pct fall in equity markets, some slightly more sceptical minded investors view these higher cash levels as a wish rather than reality.