World Week Ahead: Grexit looms large

Monday 29th June 2015

A surprise call by Greek Prime Minister Alexis Tsipras for a referendum on the latest bailout offer from the nation’s creditors has sharply increased the risk of default and exit from the euro as well as a surge in market volatility.

“The probability of Greece leaving the euro, sadly, has only increased with this decision,” Nicholas Economides, professor at the Stern School of Business at New York University, told Bloomberg.

That’s because eurozone finance ministers immediately rejected Greece's late Friday request to extend a June 30 debt repayment deadline until after the proposed July 5 referendum.

Neither the ministers nor Greece’s creditors were informed of the proposal ahead of Tsipras’s call for it and weren’t impressed with the unilateral statement after months of sometimes very difficult negotiations.

Failure to make Tuesday's debt payment of about 1.5 billion euros would result in Greece's default.

"The current financial assistance arrangement with Greece will expire on June 30, 2015, as well as all agreements related to the current Greek program," according to a statement from the Eurogroup "except the Greek member".

Last week, Europe’s Stoxx 600 Index added 2.9 percent for the week.

“Markets will likely go into risk aversion mode on Monday,” Beat Siegenthaler, a senior investment adviser at UBS Group in Zurich, wrote in a note, Bloomberg reported. “Until [Friday] night there had been a strong consensus that a deal would be reached over the weekend. The new situation following the Tsipras’ announcement is a much worse outcome than expected.”

Last week on Wall Street, the Dow Jones Industrial Average slid 0.38 percent, the Standard & Poor’s 500 Index fell 0.40 percent, while the Nasdaq Composite Index retreated 0.71 percent. Even so, the Nasdaq touched fresh record highs last week.

In the US, a key focus will be the June jobs data with the ADP employment report due on Wednesday, followed by weekly jobless claims and the government’s nonfarm payrolls report on Thursday. On Friday, US financial markets are closed for the July 4 Independence Day holiday.

On Tuesday, St Louis Federal Reserve Bank President James Bullard will speak in St. Louis.

More data on the US housing industry will be released in the next days, with pending home sales index today and the S&P Case-Shiller home price index on Tuesday, following last week’s reports suggesting the sector is finally turning a corner.

Other reports scheduled for this week include the Dallas Fed manufacturing survey, due today; Chicago PMI and consumer confidence, due Tuesday; motor vehicle sales, the PMI and ISM manufacturing indices, and construction spending, due Wednesday; and factory orders, due Thursday.

Over the weekend, China’s central bank lowered its benchmark lending rate to a record in a fourth cut since November, while also reducing banks’ reserve requirements.

China's stock market indices have been sliding in the past couple of weeks, with the Shanghai Composite Index alone shedding 7.4 percent on Friday.

"The simultaneous cuts in interest rates and reserve requirement is a forceful move, indicating the downward pressure on the economy is very big,” Xu Hongcai, senior economist at the China Centre for International Economic Exchanges, a Beijing based think tank, told Reuters.

"The monetary policy adjustment will also help curb sharp fluctuations in the stock market.”

BusinessDesk.co.nz

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