Thursday May 28

Stocks fall ahead of Friday’s GDP revisions. The S&P loses 0.1% to 2,120 while the Dow falls 0.2% to 18,126. Data on Friday will show any revisions to 1Q GDP which many analysts expect to show contraction in the U.S. economy. Another day passes without any reassuring news out of Greece. Today’s data showed that jobless claims for the week fell more than estimated, however still below 300k. The main concerns plaguing markets right now are the Fed, Greece, the strength of the dollar, and low oil prices. Without any additional positive indicators stocks will slide down as a result. John Williams from the San Francisco Fed says that interest rates are likely to rise this year. The Treasury yield stays flat at 2.13%. In Europe, eurozone officials deny reports out of Greece that a deal is close. Christina Lagarde, head of the IMF, says that Greece could leave the euro but that would not signify the end of the shared currency. Persistent negotiation blocks remain, including reforms to the pension system, sales tax implementation, and credible surplus and budget projections. In spite of Greek concerns, the euro rises 0.3% on the day to $1.0932.

One prominent economist at the G-7 meetings expects Greece will be able to scrape enough funds together to meet the IMF payment. If absolutely necessary in the event of a Greek “accident,” the country will be able to use capital controls, deposit freezes, and IOUs to control bank runs and capital outflows. Starting June 5 and in the following weeks, Greece will owe €1.6T to the IMF. Greece remains more optimistic than its creditors, as the officials from the country express optimism that a deal will be reached in the upcoming days. The chief spokesman for the Greek government says that a deal could be reached by Saturday, and he insists that the country is trying to prevent a default. Officials from the IMF and other creditors say that deal terms are still far apart. Several times over the last few months, Greek officials have claimed a deal to be close, however it has never materialized to be true. The IMF wants credible budget numbers and pension system reforms, among other demands. Greece wants debt relief to make their debt levels sustainable. Eurozone finance ministers had hoped for a deal by the end of May, however it appears that this has been pushed back to before the IMF payment on June 5. It is possible that creditors may resolve to bundle the series of payments together and have them due all on the last day in order to provide more time for negotiation. U.S. Treasury secretary Jacob Lew expresses concern over the situation, and says he has been involved behind the scenes.

Puerto Rico passes a tax increase to help its financial situation, however its future solvency is still a concern. Last week Moody’s downgraded Puerto Rican debt further into junk territory as the country is likely to default at some point. The country has a complex web of various forms of government and agency debt. The country has $72B in debt in the form of direct and indirect obligations that each have different rankings and legal protections. One analysts says it is the most complex capital structure he has seen. The debt to GDP ratio is modest compared to other struggling countries, however the country still faces default in the future. It appears that the bottom on the creditor line of preference is bonds issued from state owned utility, transportation and infrastructure companies, a sum that is valued at $24B. Pension bonds, bonds from the University of Puerto Rico, and specific revenue backed bonds further complicate the capital structure. Analysts and investors are trying to sort out the creditor line of preference in order to untangle the country’s finances and decide how to best proceed.

Thursday May 28

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