Global Themes

The focus of the market this week is on whether Greece will be able to stave off an imminent default or manage to get some kind of compromise with the Troika, which will kick the can a little further down the road. The scramble to reach a deal reached a crescendo today after brinkmanship from both sides of the negotiating table last week. Greek PM Alexis Tsipras escalated the verbal assault on the IMF accusing it of “financial asphyxiation.” He went on to add that the IMF bore “criminal responsibility” for Greek’s cash crisis. As per data from EC Greek Pension payments are 16.2 percent of GDP with Italy a close second at 15.7 percent. The bone of contention in the talks are cuts to these large pension payments. European Central Bank (ECB) officials were quoted as saying "whether Greek Banks would be able to open on Monday" given the massive outflows of deposits they are witnessing. As we run into the month end deadline for Greece to repay about Euro 1.6 billion of loans to the IMF and with no deal in sight, the confidence of Greek depositors is ebbing with about a billion euros being withdrawn from the banking system on each day last week. Talks of impending capital controls have resulted in deposits making a beeline to withdraw cash from the banking system. Greece submitted new proposals on Sunday for the crisis talks in Brussels on Monday and hopes of a deal skyrocketed sending Greek stocks higher by 8 percent. Greek two year bonds rallied sharply in European trade today with the yield plummeting 400 bps.

GOLD

Gold prices got a boost after dovish comments from FOMC Chair Janet Yellen at the press conference after the two day FOMC meeting where the FOMC statement was largely left unchanged. The lower trend in the FOMC members “dot plots” was also supportive of higher precious metal prices. Gold which has lost its luster with expectations of higher interest rates in the US Dollar could make a comeback if US economic data is weaker than expected which would push back the timing for a Fed rate hike.

CAD

The Canadian Dollar was hit by weak data on Friday but higher than expected inflation data held it back. Retail sales for April were sharply lower than expectations falling 0.1 percent after two months of strong gains in February & March. Sales fell in 4 of the 11 subsectors with the biggest drop coming in electronic & appliance stores of 8 percent. Food and Beverage stores reported a drop of 1.3 percent & gasoline sales were lower due to the impact of lower prices. Motor Vehicle & parts sales were buoyant for the third consecutive month rising 1.3 percent driven by record low financing costs. Consumer Price Inflation (CPI) for May came in higher than expected rising 0.9 percent (Y-on-Y). At the core level inflation moved further above Bank of Canada’s target of 2 percent, coming in at 2.2 percent. The difference between core and headline inflation can be explained by the plunge of 17.4 percent in gasoline prices. The weakness in the Canadian Dollar is now feeding through into inflation and rising inflation will reduce chances for another rate cut in the economy.

MXN

The Mexican Peso has been firming up against the US dollar after hitting the lowest ever level in early June. Higher Crude Oil prices and a weaker US Dollar has helped it consolidate. The Mexican Peso got some support from Fund Manager Bill Gross who remarked that he is bullish on Mexico and is of the view that the Mexican Peso is 15 to 20 percent undervalued. Last week the Mexican Central Bank held rates steady, amid weakness in the economy it expected inflation to be contained at around 3 percent and the weakness in the Mexican Peso is not expected to feed through into higher inflation due to the weak domestic demand.

EUR

The Euro has shown some significant resilience as the Greek debt crisis is coming to some kind of deadline with Euro 1.6 billion of loans due at the end of this week. The resilience of the Euro is due to three factors; firstly deflationary fears in the Eurozone seem to have dissipated to some extent with inflation numbers from across the Eurozone showing that the pace of disinflation has ebbed significantly in the last two months. Eurozone CPI for May was confirmed at 0.3 percent (Y-on-Y) which was as per the provisional data released in early June. This is the first time CPI has been positive or greater than zero since November last year. Secondly, Sovereign bond yields have surged higher on the back of disappearing deflation which has supported the upmove in the Euro. German 10-year Bund yields had hit a low of 0.49 percent on April 17 and within two months they traded higher than 1 percent in early June. Thirdly, mixed data from the US has resulted in lower expectations of a Q3 rate hike by the Federal Reserve resulting in a weaker US Dollar across the board which has supported the move higher in the Euro. The market is cutting short Euro positions in spite of the Greek crisis and last week as per data from CFTC speculative short positions in the Euro fell 35 percent to 89.4 contracts in the week ending June 16. The Euro could trade in a volatile range this week and as is typical with Eurozone we could witness a last minute deal.