Tankan Beats Expectations, But Greece Seems More Important

 | Jul 01, 2015 04:20AM ET

•The last try fails Greece made a last-ditch effort to secure more funding before its current program ran out, but was basically told that it would be impossible unless it cancelled the referendum. It all came to nothing and the country failed to deliver the money it owed to the IMF, which quickly declared Greece to be “in arrears.” That declaration gives the European Financial Stability Fund (EFSF) the right to demand immediate repayment of their EUR 142bn in loans to Greece if they want to. Failure to repay those loans on demand would trigger all sorts of cross-defaults and might make it impossible for the ECB to continue to support the banking system. In other words, the collapse of the government’s finances and the banking system. So far, the indications are that the EFSF will not pull the trigger at least until after the referendum. The possibility of them sending the country into bankruptcy does increase the pressure on Greece.

• ECB Board member Ewald Nowotny said that July 20th, when Greece must pay the ECB EUR 3.5bn, is “probably the most important date.” “…(H)ow can a country which has no access to the ECB continue its activities?” he asked, indicating that if Greece votes “no” on the referendum and therefore fails to get a new funding package, it will not be able to repay the ECB and the ECB will have no choice but to cut off its Emergency Liquidity Assistance (ELA). That would mean that the banks would become insolvent and have to close.

• Conclusion: it all comes down to the referendum on Sunday So the last door slammed shut, and now there’s nothing to do but to wait for the results of the referendum on Sunday. The indications are that the result may be finely balanced. Older people who have pensions and remember what life was like before Greece joined the EU are said to be leaning towards voting “yes,” while younger people with no savings, no job, no future and nothing to lose think that a “yes” vote will at least give them hope. It’s likely to be close. After seeing the results of the UK election, I wouldn’t place too much confidence in polls.

• Tankan beats expectations, but Greece seems more important The Bank of Japan’s quarterly Tankan business confidence survey for Q2 was much better than expected, at least for large companies, but the muted response in the stock market (up only about 0.25% in early afternoon Tokyo trading) suggests that events in Greece are just as important to investors in Japan as the domestic economy. Moreover, other signs of activity suggest that the Japanese economy probably slowed or even contracted in Q2. USD/JPY was slightly higher this morning but nothing significant. Although I remain long-term bullish on the pair, I would be cautious about going long USD/JPY at this point, because I think there could be a “flight to safety” that would push it down if the situation with Greece gets uglier.

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• Australian building approvals for May were much better than expected, nearly double the mom rise that the market was forecasting. It’s not clear though whether that was the reason why AUD was the best performing G10 currency over the last 24 hours. In fact, AUD/USD seems to have tracked Japanese stocks fairly closely – perhaps a risk-on play? China’s final manufacturing PMIs for June, both the official and HSBC versions, were revised down from the initial estimates, so that didn’t help. Meanwhile iron ore prices fell below USD60 a ton for the first time in five weeks – although that was because of an estimate that shipments from Australia will rise 10% next year. Perhaps investors feel that the increase in volume will make up for the fall in prices. I think the rally is overdone, given all the problems in China, and would expect AUD to fall back today.

• CAD weakened the most of any of the G10 currencies despite another rise in oil prices, after the April GDP figure showed the fourth consecutive monthly contraction in activity. GDP was down 0.1% mom instead of rising 0.1% as expected. Not only did oil and gas and other natural resources activity fall for the sixth consecutive month, but also non-energy exports and consumer spending have failed to show the strength that the Bank of Canada was counting on to take over as drivers of growth. USD/CAD is now challenging the recent highs of end-May/early June (1.2563 on June 1st) and could meet some resistance.

• Today’s highlights: Weekly ECB meeting The weekly ECB meeting will as usual reconsider the Emergency Liquidity Assistance (ELA) that it supplies to Greek banks. It should continue the money, but the fact that the country defaulted to the IMF may change things – perhaps make the ECB demand more collateral. That would put additional pressure on the government by reducing even further the amount of money available to the public. The effort could backfire, however. Articles I’ve read suggest that Greeks blame the European authorities, not their own government, for the inconvenience of having to line up for limited amounts of money every day and that the humiliation is making them more determined to vote “no” on the referendum in order to demonstrate their independence.

• During the European day, we get the final manufacturing PMI figures for June from several European countries, and the Eurozone as a whole. As usual, the final forecasts are the same as the initial estimates, thus the market reaction on these news is usually limited, unless we have a huge revision from the preliminary figures.

• UK manufacturing PMI for June is forecast to increase a bit, which could prove GBP-positive. In addition, Bank of England Governor Mark Carney presents the Bank’s semi-annual assessment of financial stability risks. Since the December report, the central bank has highlighted market-liquidity risks and the weakening global economic outlook.

• In the US, the ADP employment report for June is coming out, this time only one day ahead of the nonfarm payroll release, as US markets will be closed Friday due to the US Independence Day holiday on Saturday. The ADP report is expected to show that the private sector gained more jobs in June than it did in the previous month. That would increase expectations of a strong nonfarm payroll figure as well and boost the dollar, although in fact the correlation between the two indicators is not particularly wonderful. The final Markit manufacturing PMI and the ISM manufacturing PMI both for June are also due out.