How's the view, one week later ?

Monday 20th July 2015

 How's the view, one week later ?

 

Some general first impressions after 7 days pretty much incommunicado :

Greece :- 

 Banks re-open today, albeit in a limited fashion and capital controls remain in place. Nevertheless this may provide a boost to morale (see "Greek banks to reopen....",The Financial Times, p.6), as will news this morning that the Greek government has okayed debt repayments of 6.8 billion euros which includes 3.5 billion due to the ECB today and two payments to the IMF that had previously gone by unpaid.

 Less confidence-building is the realisation that this accounts for almost all the 7 billion euro bridging loan secured by the new deal. We never expected any deal to signal great bursts of optimism, but the sense in certain quarters that Greece is a long way from being better off is palpable. The release of further financing requires Greece to act on its promises before distrustful creditors will loosen the purse-strings. The creditors themselves are at odds with each other : the IMF believe some measure of debt-forgiveness is essential, whilst some Eurozone nations (especially Germany) will not yet countenance the idea. Any hopes that agreement on debt-relief might come to pass could be scuppered if Greece's ruling Syriza party run into domestic political problems and are forced to call a snap election (for October, say  --  see "Athens under intense pressure over ballot, The Financail Times, p.6).

And most fundamentally, it's hard to escape the realisation that a combination of blundering and miscalculation by the Greeks and an insistence on completely unrealistic, even destructive, conditions by creditors has resulted in Greece accepting a much tougher deal than they were previously offered. For some, such a deal is just not sustainable and Grexit still looms. For such a view, see "Grexit remains the likely outcome of this sorry process" , The Financial Times, p.13 .

 

Spain :-

Even if some observers remain sceptical about the prospects of a happy ending for the Greek saga, Eurozone officials will take some comfort in the latest opinion polls to emerge from Spain where a general election is due to be held in November. We've talked before on how the anti-austerity party Podemos, in the hope that they might gain a similar position of power, was watching how the actions (antics?) of Greece's Syriza party played out. By any reckoning, the answer to that is not well.

The consequences of that can be seen in the poll results. On July 5th, polls suggested that Podemos was running near enough neck and neck with the two main political parties, the ruling PP and the socialist PSOE. The latest numbers put PP at 29.1%, PSOE at 25.1% and Podemos down at 15%.

Spain has taken its austerity medicine and growth forecasts are now north of 3.0% . The implication drawn from the opinion polls is that despite continuing high unemployment numbers the Spanish voters may be realising that economically speaking a "safe pair of hands" is preferable to risking the same kind of chaos that has befallen Greece. Any signs that a Greece-inspired domino effect, with anti-austerity and nationalist interests gaining power across the EU, have been reduced will be warmly welcomed by the EU  --  even if it has taken the sad demise of one member to act as a deterrent to others.

 

Gold :-

 Overnight the price of gold fell to a low of $1087 per oz , a drop of 4.2% and a 5 year low.

The fact that gold is no longer considered much of a "Buy" for safe-haven purposes doesn't mean it's not a "Sell" when things calm down a bit, if you can so describe the Greece deal and the halt to the China stock market rout. But there's a lot more in play here than any unloading of crisis-hedging positions.

It's true that part of the latest fall can be put down to China publishing the size of its gold reserves. These were last published 6 years ago, and reserves have risen 57% in that time. That sounds quite a lot, but was considerably less than most expected and suggests that China's gold buying programme is less aggressive than we previously thought.

 But the main culprit behind the fall is perceived to be..... Fed Chairwoman Janet Yellen.

To be more precise, on Friday Ms Yellen reiterated the Fed's determination to begin the rate-rising cycle when appropriate and her comments were taken to mean this could be sooner rather than later, ie this year and maybe as soon as September. Only 10 days ago we were discussing how the IMF were urging the Fed to wait until next year. Higher US rates imply a stronger dollar, and since gold (and many other commodities) are quoted in dollars that means a lower price, even if its intrinsic price in other currencies has not moved. Higher rates also implies higher yields in assets like bonds. So the question investors are asking themselves is .....why would I be in a non-performing gold market when I could be in a higher-yielding bond market or an appreciating dollar (or both at the same time in the case of US Treasuries, for example).

How are the mighty fallen .... it doesn't seem that long ago that gold was trading at $1900 per oz and $2000 seemed a viable target.