Stocks are neutral as Greek talks with Germany remain the biggest headline. S&P falls less than a point to 2,068 while DJIA falls .04% to 17,862. Core and peripheral (not including Greece) eurozone yields stay relatively stable, reflecting a calm market ahead of any decision made regarding Greece. These bond yields and CDS market both reflect a low probability of contagion in the event of a Grexit. 10 year bund falls 1bp to .36%. 10 year treasury up 1bp to 2.00%. Many economists believe that the run in treasury prices is over, and that yields will edge higher ahead of the rate hike and reach 2.5% by the end of the year.
Germany shows some willingness to compromise with Greece ahead of their meeting. This increases the chances that Greece remains in the eurozone. In the meantime, Greece wants to finance the government through increases in short term debt but the ECB doesn’t want Greece to exceed it’s 15 billion euro limit on issuance. Following these developments, U.S. stock futures rise which shows optimism that Greece will remain in the EU bailout program.
Options prices for the euro show that investors expect the currency to be more volatile over the next month compared to volatility one year from now. This shows that markets are expected to be more calm after the outcome for Greece. This could reflect that investors expect Greece to stay in the eurozone, or that investors are becoming comfortable with the idea of Greece leaving the euro. Fear of contagion is less compared to Greece’s last crisis, as other members of the euro have strengthened their growth (slightly) since then. This price structure is unusual, as typically there is more uncertainty about what will happen further into the future.
Alan Greenspan says that a Grexit would be the best solution, as no one wants to hold Greek bonds and EU leaders need to stick to their bailout terms. However, Morgan Stanley projects that the euro would depreciate to $0.90, which would be disastrous for the euro recovery.
Chinese monetary policy has quietly shifted in the last year in order to increase the money supply, as large capital inflows into the country for speculative motives have stopped. For example last week they cut the reserve ratio for commercial banks. Many of the tools that the PBoC have used are related to loans to commercial banks in both the short and medium term.
Fighting in Ukraine worsens as Putin and Ukranian leader meet for last attempts at a ceasefire. If a ceasefire is not agreed upon then the U.S. is likely to intervene in support of Ukraine. In this event, markets will likely fall due to the geopolitical risk, similar to this past fall.