SCOREBOARD: Greek waiting game

It was risk off in Europe, and caution in the US, as concerns of a Greek exit persisted – despite the evidence.

The word on Greece is June 17. That’s when the next election will be held and until then a caretaker government has been appointed. So far, the Greeks haven’t been taking their money out of the country en masse, with deposits still around $165 billion, although that is down some 17 per cent through 2011. Having said that the central bank is warning it is seeing more withdrawals now – it is a growing concern but the bank has said that as yet there is no panic.

So at this stage, the real money isn’t yet pointing to the inevitability of Greek exit from the eurozone. Guesses are all we have now and most of those are guided by emotion rather than analyses – die hard euro sceptics, etc, who have never really contributed much to the discussion as they never really understood the impetus behind European integration. Economic efficiency was not the primary consideration.

I suspect that if citizens really thought Greece was going to leave the eurozone, deposit withdrawals would have been much larger. It’s certainly not inevitable that Greece will exit then, it is an option now and the Greeks must choose. But a certainty it is not and indeed it is still the least likely scenario given the costs involved, the fact that it would be an irrational decision and that polls are still showing 80 per cent support for the eurozone within Greece.

Risk is still being taken off the table, though, and European equities generally soured again last night. In Europe the Dax fell 0.3 per cent, the CaC was up 0.3 per cent, while the FTSE fell 0.6 per cent. Euro was then little changed, up slightly maybe, to 1.2711, while Spanish and Italian bond yields eased some – Spanish 10-year yield down 5 basis points to 6.27 per cent and the Italian equivalent was down 4 basis points to 5.82 per cent.

Over in the US, markets didn’t quite know what to do. I mean, all the data continues to come in on the positive side. Industrial production out last night rose a stronger-than-expected 1.1 per cent in April (0.6 per cent expected) and even housing starts shot up much more than forecast. Growth-wise, starts were actually weaker in April at 2.6 per cent compared to a forecast of 4.7 per cent, but there was a decent upgrade to March’s figures and so overall starts are stronger. Shortly after that data the S&P was up 0.8 per cent but the offer came on and at the close the index was down 0.4 per cent (1324). Other than consumer goods and healthcare, most sectors were weaker with financials, basic materials and tech stocks leading the charge (Nasdaq was off 0.7 per cent). Elsewhere we saw the Dow off 0.3 per cent (12598), and the SPI fell 01 per cent (4153).

As for commodities, things were mixed in the metals space but moves were small overall. So gold was up a few bucks from 1630 (AEST) to sit at $1539 and copper edged higher as well. As for crude, well, WTI experienced a pretty decent tumble, off another 1.4 per cent to $92.7. Apparently the US is pressing the G8 for a release of crude from strategic reserves in order to lower the oil price and they’ll make a firmer effort at the May 18-19 summit. Ahh, you gotta love the free market.

Talking of free markets, US treasuries did little in the end, although again, they did initially push higher. So at the high, the US 10-year was at 1.82 per cent, but yields then eased to 1.76 per cent little changed from 1630). The 5-year yield was then up almost 2 basis points to 0.74 per cent and the 2-year up 1 basis point to 0.286 per cent. As for the largest ‘investor’ in US treasuries, the US government, it still looks likely that they’ll print more money at some stage notwithstanding the acceleration in economic activity. The FOMC minutes reveal three members said a loss in economic momentum would be sufficient for them to print, and one has even said on record that you wouldn’t even need to see a loss in momentum. A failure for it to pick up would be enough. Members otherwise remain concerned about high unemployment and reckon that the recent lift in inflation above target is temporary, driven as it is by oil. And the US government is going to make sure of it, by manipulating oil markets – and then, when they’ve done that, they’re gonna manipulate the bond market some more – sorry, quan-ti-tati-vely ease. Free market economics in operation, people.

Not much else on the price action, the Australian dollar is about 25 pips higher from 1630 AEST at 0.9914, sterling is little changed at 1.5911 and yen sits at 80.31. In terms of news and data, US mortgage delinquencies fell to 7.4 per cent in the first quarter from 7.58 per cent, while foreclosures were little changed at 4.39 per cent. Over in the UK, the BoE’s inflation report suggested that inflation would likely be above target for the next year before coming down. I don’t know why they bother printing a target now, they haven’t met it for six years or more and of course they will do nothing about this breach. Otherwise, UK unemployment fell to 8.2 per cent in March from 8.3 per cent and eurozone inflation was at 2.6 per cent year-on-year to April from 2.7 per cent year-on-year to March also well above target.

Looking at the day ahead there isn’t much for Australia today, so for the rest of the world, look out for Japanese first quarter GDP at 0950 AEST, then tonight we get US jobless claims and the Philly Fed index.

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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