Monday February 9: Tsipras Speech Rattles Markets

Stocks fall as gold and the yen (both haven assets) gain as Greece rejects bailout terms which increases risk in the eurozone. S&P falls .4% to 2,046 and DJIA falls .5% to 17,729. In currency markets, the yen gains versus the dollar as does the rouble as Russia enters talks for a cease-fire with Ukraine. Greek Prime Minister Tsipras talks of negotiating an end to austerity measures. He vowed to increase minimum wage, restore income tax-free threshold, and halt infrastructure privatizations which clashes with austerity measures with creditors (Germany). In addition Greece will seek ten billion euros in short-term financing to prevent running out of cash. As a result 3 year Greek bond yields jump 308 bp. German 10 year bund yield falls to .35%. US 10 year up 2bp to 1.95%.

Market for fed funds futures show that rates are most likely to rise in June, reflecting a 70% chance of this happening (up from 40% earlier). This comes as a result of Friday’s strong employment report which showed both job and wage gains.This sets the stage for further market volatility due to central bank divergence around the world. Fed must decide how to communicate this without causing a panic in the markets and a sell off in short-term fixed income securities.

Crude oil prices increase after OPEC forecasts a rise in demand amid slowing U.S. output. They believe that project deferrals by big oil companies will bring support to oil prices going forward. By contrast, Citi says that it is impossible to call a bottom in the oi market, and predicts that prices may continue to fall into the twenties as the cuts to production won’t hit until the third quarter.

Some economists believe that global growth scare is being overblown. They cite cheaper oil, low interest rates, and weak currencies as factors that will help the global economy as the U.S. expansion leads the way. Low oil prices should boost the spending power of both companies and households, and could add .5% to global GDP over the next two years. Low rates around the world (Canada, India, Australia, Turkey, Russia all recently cut rates) should help global stocks. Weak currencies will help exporters in many foreign economies, helping them gain competitiveness (euro has fallen 11% against peers over the last year). U.S. will continue to lead the way with increasing demand, which was reflected in December imports which rose 2.2% to a record. Chief DB economist predicts that world economy will grow 3.6% this year, which is the fastest pace since 2011. Two of the biggest risks to global growth are Russia and Greece. Russia’s unpredictability and trade sanctions and Greece’s imminent financial crisis are both serious threats to the eurozone.

Monday February 9: Tsipras Speech Rattles Markets

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