Greece and the Fed dictate market caution
The Euro is down around 0.35% against the $US in early trading this morning while Australian 10 year bond yields are also down about four basis points compared to Friday. This suggests only limited market reaction to yesterday’s news that talks between Greece and the European Commission broke down. This quiet and cautious response is likely to flow through to this morning’s stock market.
While markets recognise there is room for caution, there are risks in both directions when it comes to Greece. If a solution is negotiated this week, there is room for a “risk on” buying response by the share market. With this being the case, markets may be relatively quiet with investors taking a wait and see mode on Greece, prepared to react if required when the outcome is finally known.
This week’s Fed meeting provides another reason for traders to be cautious for the next couple of days. Early signs of ongoing improvement in the US economy in May have increased the chances that the Fed will be more explicit about a tightening bias for coming months. However, it is also likely to reinforce the fact that the chances are that pace of any tightening following the first rate hike will be very gradual. Underemployment remains high and language reinforcing a very cautious approach will be necessary to prevent bond yields and the US Dollar becoming too volatile and rising too fast.
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Frequently Asked Questions about this Article…
The breakdown in talks between Greece and the European Commission has led to a cautious market response. Investors are in a 'wait and see' mode, prepared to react once the outcome is known, which means the stock market might remain relatively quiet until then.
The Euro's decline of around 0.35% against the US Dollar suggests limited market reaction to the Greece situation. For everyday investors, this means there might not be immediate drastic changes, but it's important to stay informed as the situation develops.
Investors should be cautious because the Fed meeting might indicate a tightening bias due to improvements in the US economy. However, any rate hikes are expected to be gradual, so it's crucial to monitor the Fed's language to understand future market movements.
A 'risk on' buying response occurs when investors feel confident and start buying riskier assets, like stocks, in anticipation of positive outcomes, such as a resolution in the Greece negotiations. This can lead to a rise in stock prices.
The Fed's cautious approach is intended to prevent US bond yields from becoming too volatile or rising too quickly. Investors should watch for any changes in language from the Fed that might signal shifts in bond yield trends.
If a solution is negotiated with Greece, investors might see a 'risk on' buying response, leading to increased stock market activity and potentially higher stock prices as confidence returns.
High underemployment in the US means the Fed is likely to adopt a very cautious approach to tightening monetary policy. This is to ensure that any rate hikes do not negatively impact the economy or cause undue volatility in the markets.
Both Greece's negotiations and the Fed's decisions can significantly impact market conditions. Investors need to stay informed about these developments to make timely and informed investment decisions, as both can influence market volatility and investment opportunities.
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