Wednesday June 10

Stocks rise after unconfirmed reports that Germany is trying to reach a deal with Greece. The S&P rises 1.2% to 2,104 and the Dow rises 1.3% to 18,000. Also contributing to positive sentiment was the Treasury budget which showed that the government deficit narrowed by more than expected. Economists expected the deficit to be -$97B although it came in at -$82.4B. A demand for Treasuries at a 10 year auction had relatively high demand with a bid to cover of 2.74 which was the highest of this year. In addition primary dealer takedown was only 30%. In spite of the demand for Treasuries, the 10 year yield increased 5 basis points on the day to 2.48%. The Yen appreciated sharply against the dollar after the governor of the BoJ says that the yen is at its weakest point citing an improved economic outlook. The Yen rose to Y1.2247 (yen per dollar) after being as low as Y126 last week. The euro appreciated to $1.13 the bund yield rises above 1% to 1.06%. In this way markets in Europe responded to the increasing inflation outlook as opposed to Greek concerns.

Political risk relating to public infrastructure projects in Europe is increasing. Governments have been attracting investors to fund infrastructure projects with relatively high yields. Aena is a series of separate airports in Spain that was privatized as one entity. The largest shareholders are an activist investor group from the UK called TCI and the Spanish government. Originally, tariffs that the Aena charged were set at a fixed low rate for the next ten years, however an oversight committee called CNMC lowered the tariffs. This action brought about lawsuits by Aena and TCI. This increases the legal and political risk for similar projects in Europe, as does a similar situation going on right now in Norway involving an oil project. Big pension funds have had a large appetite for investing in these projects, attracted by their relatively high yields. As a result of the increasing risk, these public projects may fail to gain investors in the future.

Fears of capital controls in Greece are increasing. The largest outflows from Greek banks occurred in January and February when the Syriza party won control of the government. Deposit holders in the country now fear that the radical government may prevent withdrawals of bank deposits or impose heavy taxes on accounts if tension with creditors increases further. As a result, investors have been finding other ways to protect their assets. New car registrations are rising at a very fast pace rising 47.2% in April and 27.9% in May. The risk of capital controls increases as outflows from banks continue, and the net outflow of deposits has been negative every week since December. According to Eurobank, one of the largest four Greek lenders, €30B has left the banking system in recent months. With €500mm alone leaving last Friday when Greece missed a debt payment to the IMF. Hopes that a deal is close are falling, with Germany now asserting a take it or leave it approach.

Wednesday June 10

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