Weekend Summary & The Week Ahead
Sterling suffered it’s worst week of trading since may last week, as worse than expected U.K. data combined with some short term memory loss over Greece to help push the Pound lower and the euro higher. Despite the Bank of England’s recent rhetoric of a ‘more balanced’ argument for rate hikes, the members of the monetary policy committee still voted 9-0 in favour of keeping them on hold – and with no dissent from the more hawkish side of the policy table, a rate rise is still seen to be months away.
From Greece; Alex Tsipras is going to be facing quite the diplomatic challenge in the coming days, as Yanis Varouafkis confirmed that he was authorised to draw up a ‘plan B’ and in order to do so had to hack into his country’s own tax and revenue computer systems, which at the time were under the control of the troika. Details of what were to happen if the country wanted to move to plan B, aren’t entirely clear, but it seems that the broad brushstrokes were to go on a bank account raid in order to provide euro liquidity and then adopt a parallel currency, which was already programmed into parts of the greek banking system and could be activated at will.
Greece’s creditors will be very keen to learn of what was developed and how close it came to being implemented, but the revelation Greece was doing all that it could to consider alternatives to what it has ended up with shouldn’t really be that surprising and we’d doubt that this is a game changer for negotiations.
All this talk of upset in Europe (not just from the Greeks, but from the U.K. with the renegotiation) has got the European powers that be working on a plan to allow an orderly exit from European union membership. According to German press, the plan would be to have specific targets and criteria to meet – much like on the way into becoming a member of Europe – that, if met, result in an orderly exit, with continued support from E.U. member states. Though this goes against the ideologies of ‘more Europe’ that we’ve been hearing from certain politicians, it’s reassuring that they are getting a contingency together, as without it there would be no such thing as an orderly exit.
It wasn’t just the Pound having a bad week last week; oil prices fell back below $50 per barrel, trading 20% lower than the highs it saw in June, which officially puts the commodity into a bear market. Those betting in the futures market that oil will rise in coming months cut their long positions by almost 30% last week as oil companies have shelved plans that were being tentatively drawn up on the back of the ‘recovery; earlier this year.
The effects of oil are also being felt in wider commodity markets, which is in turn pushing on commodity currencies. Last week was particularly bad for the Canadian, Australian and New Zealand Dollar, as well as more volatile emerging market commodity currencies, such as the Turkish Lira, Brazilian Real and South African Rand. All of these currencies are now sitting at multi-year lows against the U.S. Dollar, as a result of the falling value and volume of their exports and also fears that the Fed will raise rates in the very near future and that China is not going to be able to pick up their slowing pace.
China’s stock market has opened lower overnight, as it picks up on the close of Wall Street on Friday. Being China, they’ve already lost – in percentage terms – more in a day than Wall Street lost all of last week. Overnight data showed that state owned industrial businesses missed earnings expectations, which quashed optimism that May’s positive reading for this number wasn’t just an anomaly.
Looking to this week; talks with Greece and its creditors are likely to start on Tuesday now, having been delayed from kicking off over the weekend. There is now concern that the talks will run past the August deadline, but that really should come as no surprise to anyone given the past five years. The IMF will be joining the talks after Greece officially requested loans from them at the weekend, so Christine Lagarde will probably be relieved that the whole gang is back together and that she’s still part of it.
The data calendar this week is pretty heavy, but after a week’s reprieve from Greek headlines, this week’s talks could overshadow the economic fundamentals. Today we see the German IFO survey and U.S. durable goods orders