Markets rally as Greek deal reached

Monday, July 13, 2015

Greek debt negotiations over the weekend saw little progress as the deadlock showed no signs of breaking. Markets had ended the previous week on a relatively upbeat note with investors across both sides of the Atlantic returning en masse into equities, capping off what had been a volatile week detached from the fundamentals as sentiment took the driving seat. However, after hours and hours of talks in Brussels and as Greece inched closer to the precipice of an exit from the euro we saw no material developments over the weekend. Concerns of a Grexit have weighed heavily on investor sentiment and with time quickly running out for Greek PM Alexis Tsipras and his Syriza party it seems the political cat and mouse that has dominated negotiations over the past few months may finally be coming to an end. Eurozone lenders stepped up the pressure and comments from Germany over the past 48 hours suggested that some creditors are taking a much firmer stance in recent meetings.

With Greece fast running out of money and its banks shut over the past two weeks, we wondered how long the standoff could last. It seems developments earlier this morning indicate a deal has been reached. European Council President Donald Tusk as well as the Belgian Prime Minister have both tweeted that a deal has been done. After 17 hours of talks in Brussels Greece has finally managed to negotiate amicable terms with its creditors and will soon start formal talks on its third bailout programme. Finally, it seems we can put this issue to rest as the tense standoff between eurozone lenders and Athens comes to a climactic end. Of course, we aren’t out of the woods yet as there is still a long way to go on the path to recovery for Greece but we hope that the agreed reforms, details of which will be elucidated in the coming hours and days, will put the months of political wrangling aside and set them on a sustainable path.

European stocks rallied strongly on the news of the deal with all major indices in the region pushing confidently higher. German bund yields spiked higher early on as investors pulled funds out of the safe haven on improving risk appetite. 10 year bund yields rallied towards a four week high, trading towards 0.986% while peripheral market yields dropped sharply on the positive news with Spanish and Portuguese ten year bond yields leading the charge lower. The euro held firmly onto early gains, trading towards 1.1170 against the dollar as it held under near term pressure presented by the 50 day moving average. We expect the single currency to remain well supported over the coming sessions as investors’ confidence improves, however, given the diverging monetary policies of the US Fed and the ECB, the continuation of QE in Europe could limit any protracted gains in the euro.    

In what was a week largely dominated by ongoing Greek concerns, investors could be forgiven for overlooking developments in the US as the outlook for a 2015 rates rise becomes more and more likely. Last week’s FOMC meeting minutes once again hinted at a rate rise this year and Fed Chair Janet Yellen’s speech in Cleveland offered further details as she commented on improving economic conditions in the US providing the necessary catalyst for an increase in the fed funds target rate even in the face of market turmoil in China and Europe. With a line finally being drawn under the Greek debt crisis, attention will slowly shift back to the fundamentals and we could see further bullish data coming out of the US strengthening the case for a rates rise, potentially at the FOMC’s September meeting.

German bund yields rise as deal news emerges

GDBR10 Index Germany Generic Go 2015 07 13 08 20 17

EUR pushes higher and holds firm around 1.1110

EUR Curncy Euro Spot Daily 13 2015 07 13 08 40 40

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Topics: US Fed, USD, EUR, Greece, Yields
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