The Greeks will decide, not the rest of Europe!

Equity and bond markets took the news of the Greek referendum "no" vote probably better than many market commentators and certainly financial journalists expected. On the Sunday, when it became apparent that a no vote was the likely outcome, equity markets in Europe were indicating down as much as 4%, the reality on Monday was nearer 2%. Equity investors initially took the view that this was the low point in the news flow, and from here on in a deal will be cobbled together. The European peripheral bond market has seen yields rise; Spanish 10 year bonds now yield 2.3%, against the lows in March of 1.2%, however this remains a long way from the 6% of mid 2012. Greek bonds, not unsurprisingly, have continued to react to the crisis. Two-year yields have now risen  above 50%. One would have to assume trading Greek bonds is very difficult, as volumes are all but nonexistent.

If we turn away from Greece, it's a quiet week for macro data in the US. The focus in the UK will be the budget on Wednesday. Unlike years gone by the budget seems well leaked ahead of the day, but one hopes there will be some room for surprises.  If the hand on the monetary tiller tightens, perhaps the one on fiscal tiller may loosen.

The only real event of note in the US this week will be the release of the latest minutes from the last Federal Reserve interest rate setting meeting. There is the possibility that events in Greece may make commentators decide these minutes are of less relevance, as the events in Europe may well have changed opinions post that meeting.

The reality is, as much a Greece is an economic mess, both sides of the negotiating table are to blame in our opinion. European finance ministers failed to accept long ago that Greece will never have the ability to repay the debt, irrespective of whatever amount of austerity. Either Greece will get a haircut of some kind, or they will ultimately reintroduce the drachma, and offer that instead to settle its debts.  Whatever outcome the current situation, the reality is that the Greek issue will ensure the liquidity provided by the central banks will not change. Japan will continue to buy Japanese equities and maintain its program of QE. The ECB could step up its QE program; China could add further stimulus measures. The US may well delay its rate rise.

Equities are no longer cheap any more, but they still look reasonable value against bonds, governments are going to continue to stimulate the economies. Inflation remains subdued and with that backdrop equities have performed ok. Perhaps it is naive to continue to believe that equities can continue to climb higher in the face of current events, but it may also be unwise to assume they cannot. 

Posted on July 7, 2015 .