Friday June 26

Stocks mixed heading into the weekend before Greece’s imminent default next week. The S&P was flat at 2,101 (down 0.4% on the week) and the Dow increased 0.3% to 17,947. In the US consumer confidence was strong, which economists hope will contribute to spending in the months ahead. The 10 year yield increases 9 basis points to 2.48% as economic data continues to impress. No developments have been made in Greece as the deadline gets closer. The euro fell 0.4% to $1.1170. Officials now say that Saturday is the new deadline, as Greece now needs €1.5bn for Tuesday which shows that time is running out. If a deal is reached, the plan still needs to be officially passed by both the German and Greek parliaments. Markets reflect a lack of contagion fear, with bund yields up 6 basis points to 0.92% and yields in Portugal, Spain, and Italy all firm. Many analysts still expect a compromise to some extend.

Angela Merkel tells Alexis Tsipras that the creditor offer is “extraordinarily generous” as she urges him to accept. She says that there is no alternative, as she will not be able to many any other direct arrangements other than the negotiated offers between Greece and the creditors. Tsipras rejects these pressures, saying he will not be afraid of “blackmail and ultimatums.” Bank runs in Greece could start as soon as Monday followed by capital controls. Eurozone officials are now discussing a plan B of what to if and when Greece defaults. Finance ministers in Ireland, Portugal, and Spain are particularly tough on Greece as these countries have al gone through and so far benefited from austerity measures similar to the ones rejected by Greece.

The European Banking Authority is a proponent of reviving securitization practices. This part of the financial industry has suffered since the financial crisis when complex securitized products destabilized the international economy. Now regulators believe that these securities could support economic growth in the region. Securitization involves the practice of packaging individual loans into fixed income products. These markets have been heavily regulated since the crisis and as a result volume has been low. The European Commission has been organizing a capital markets union across Europe, and it may accept the EBA’s recommendations as part of this plan. The suggestions are for “qualifying securitizations” that meet the standards of transparency, standardization, and simplicity. Banks are currently required to hold certain capital charges against the ABS they issue. The plan suggests to reduce these capital charges by 25% which would increase demand for these products.

Venezuela is running out of foreign reserves and gold, and is set to run out by early 2016. Inflation is high, the currency is weak, and there are shortages of many common goods in the country. The black market exchange rate (Bolivares per dollar) is 467 versus the official rate of 6.3 bolivar per dollar. In spite of this, yields in the country have been falling on certain issuances. A state owned oil company owed $1.5bn that is due on October. The yield on this issuance has fallen from 53.8% in January to 13.5% now representing a 33.4% total return so far. Investors had previously been pricing in a default, but the stabilization of oil prices minimizes this risk. The country is now burning through foreign reserves at a rate of $500MM each week, and at this rate the country will run out in early 2016. As a result investors believe that the country will be able to repay the money that is due in October. Foreign reserves are important because they provide the ability to pay for debt denominated in foreign currency, and it allows a central bank to intervene in FX to stabilize the currency (which is important in many emerging markets).

Friday June 26

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