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.