Stocks fall reacting to mixed data and concerns in Greece. The S&P loses 0.5% to 2,804 and the Dow falls 0.6% to 17,791. Data today showed that industrial production was weaker than estimated with a 0.2% monthly drop against an estimated 0.2% monthly gain. A housing indicator came in strong at 59 versus an estimated 56. Concerns continue over Greece, where €1.5bn loan payments are coming up in the near future, and the country almost definitely will default. The country and its creditors tried to have last effort talks today but discussions stopped after just 45 minutes. The biggest fear is that the country will be forced out of the currency union, as there is no protocol for that occurrence so uncertainty will plague markets. Implied volatility for the dollar-euro currency pair is at a three year high. The German bund yield and the Treasury yield both fall 2 basis points to 0.83% and 2.36% respectively.
Alexis Tsipras says that creditors are “pillaging” Greece and its economy. He may be implying that stringent austerity measures imposed by creditors prevent Greece’s economy from improving. Talks have stalled with harsh comments such as these coming out of Greece. Officials believe that Greece will not be able to recover after the potential default as obligations mount and the country’s finances spiral out of control. A representative from Germany says that European officials need to make a plan B which will act as protocol to use in case of a Greek default. They are concerned over the potential for a state of emergency in Greece, with the government struggling to pay for energy, police services, and medicine. Europe’s largest asset manager Aberdeen Asset Management is preparing for the worst outcome as it has established $500MM in credit lines in the case of fund outflows and redemptions. Unconfirmed reports say that Greece and creditors both made concessions but Greece was unclear in the way it would create savings and a surplus.
Yields in peripheral eurozone countries rise on Greek concerns. Bonds in Italy, Portugal in Spain all fall on concerns that a Grexit will get rid of stability in the union. With German bunds a destination for security, spreads between peripheral yields and bund yields widen as money flows out of peripheral bonds and into German bunds. The widening has not been as severe as it was during the Greek crisis in 2011 and 2012. At that point in time spreads were around 600 basis points but now they are only around 160. In this way, markets may be expecting a last minute deal. Regardless, there will likely be a large selloff if Greece does actually default.
A junk bond selloff has developed in recent weeks. Some asset managers are now finding value in the asset class. The average yield on a BoAML high yield index has risen from 6% to 6.4% as $2.6bn has flowed out of high yield bond funds last week.