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WEEK IN FOCUS: 04/07/11 - 08/07/11

 

Greece experienced a sigh of relief following a successful passage of austerity measures through Parliament last week. More good news came after the Eurozone finance ministers agreed to disburse a further EUR 12bln of aid to Greece during the weekend, to be paid by July 15th and subject to an approval by the IMF in its July 8th meeting. However, troubles of Greece may not be over, as the contentious issue of private-sector involvement is yet to be finalised. Lawmakers will have to tread carefully on this issue as any strain on private investors may lead major rating agencies to classify Greece as a “default”. Something of which was highlighted by S&P this morning who said that a debt rollover may put Greece in ‘selective default’. This will likely delay a return of the country to raise money from the market, and as is evident this morning financials are the weakest performing sector in early trade and European 10yr bond yield spreads are once again trading marginally wider. Moreover, the Greek opposition is still against much of the austerity measures, and has said that it will vote against the second aid package for Greece in Parliament. The likelihood of a snap-election this autumn is a possibility, and going by the latest polls, the ruling PASOK party is expected to lose. This allied with the ongoing demonstrations, in Greece, on the austerity plans shadows doubt regarding a successful implementation of those measures. The German finance minister, during the weekend, is quoted as saying that Germany is making provisions for an unlikely event of a Greek default, which further emphasises worries among the core Eurozone nations on this issue. In near-term events Tuesday will see the German constitutional court hearings in regards to the German role in the bailout of indebted countries. Despite concerns over potential road humps in agreements and legal complaints against recent decisions the Die Welt newspaper has reported that the high court is likely to back the Euro fund.

 

Across the Pond, the US is dealing with its own economic problems, as the country faces a potential technical default and the possibility of losing its AAA sovereign rating after August 2nd if Congress fails to agree upon raising the debt ceiling. The US Treasury has already made it clear that it would run out of legal room to borrow on August 2nd. Also, the three major rating agencies have said that any failure by the US to meet its debt obligations would result in the country facing a credit-event. Given the magnitude of market reaction in any failure to increase the ceiling means that some kind of agreement will likely be formed however it would come as no surprise if discussions were to come down to the 11th hour with markets in risk-off mode until a resolution is found.

 

Meanwhile in Europe, the ECB is meeting this week to decide on its benchmark interest rate, where the consensus is for a rate-hike by 25 basis points to 1.50%. This may provide support to the EUR and weigh on Bunds, however the EUR may come under pressure if, in his press-conference, ECB’s Trichet signals a pause in further hikes. Also, the BoE will convey to the market its decision on the key interest rate, as well as the asset-purchase target, where the consensus is for no change, at 0.50% and GBP 200bln respectively. Elsewhere, the RBA is expected to keep its cash target unchanged at 4.75%.

 

In terms of the economic calendar, US markets will remain closed on Monday owing to the Independence Day holiday. However, later in the week, we’ll see factory orders, ADP employment data, weekly jobless figures and nonfarm payrolls from the US. Services PMI and retail sales data are due from the Eurozone, whereas UK will have services PMI, industrial/manufacturing production, and PPI figures this week. In terms of fixed income, more than EUR 38bln worth of supply is due from the Eurozone sovereigns, with the likes of Austria, Belgium, Portugal and Spain coming to the market.