With some key dates and economic releases approaching, we examine the important events that could shape the outcomes of risk, forex, equity and commodity markets.
After a strong relief rally that started on June 27, plus recent increased short-covering positions in risk currencies, commodities and global equities, traders are asking themselves, are these signs of a strong second half?
We feel that despite global markets
unwinding some extremely bearish trades, we are not completely out of the woods yet. Whilst our optimism remains for the second half of the year, a lot will hinge on developments in July.
A clearer picture for Europe?
Whilst traders seem content that the EU/IMF's recent release of funds to Greece has addressed the country's short-term financial needs, there is a mountain to climb if it is going to avoid a default in the next few years. Comparisons between the events in Greece and the run up to Argentina's default in 2002 have been made, with shocking similarities. It seems that the ECB, EU and IMF will do all they can to avoid a default, and their chosen strategy is to throw more European taxpayer money at the problem. Greece, on the other hand, has surrendered its sovereignty to Brussels, Berlin and Paris, and is at the mercy of their demands for huge tax increases and budget cuts. We will see further violent protests as unemployment increases, debt mounts and growth contracts.
Major market events to watch
July 11-12
The eurogroup finance meeting on July 11-12, where the new and much talked about bailout for Greece will be front and centre. It will address the country's funding needs for the next couple of years, and if implemented correctly, should see both the euro and sentiment in general pick up. The new package has been speculated to be around 120 billion euro, with an element of private sector (namely investment banks) participation. The situation here is reasonably technical, and whether this package succeeds really relies on the views of the rating agencies. If all four agencies were to downgrade the country's debt to 'selective default', then the ECB as it stands would not provide liquidity to Greek banks and depositors would take their money and run. As a result, heavy selling would occur in German, French and UK banks that all have large exposure to Greek banks.
July 15
On July 15, results of the European bank stress tests are released, and according to Reuter's, 15 of the 91 banks reviewed could fail. The report is strategically released on a Friday (probably after the close of the market), with the idea that it gives traders time over the weekend to fully digest the information. The stress tests conducted last July turned out to be a farce, with only seven banks failing, so their credibility will be a key issue. The reaction in the markets will depend on the banks involved, plus the size of potential re-capitalisation.
July 16
European central bankers will reconvene on July 16 to discuss how they see events unfolding and assess the overall reaction to the stress tests. These are the key events that traders will focus on. However, keep an eye on daily economic announcements that could potentially feed into the markets' expectations that we will see up to three rate hikes by the ECB in the next twelve months; of note is the eurozone CPI print released on July 14.
A strong corporate America against a backdrop of weak US data
Whilst Europe seems to be firmly in 'make or break' mode, and economic data globally has been soft, corporate America is as healthy as ever. The perception though, is how companies will look if we get a complete loss of confidence amongst consumers if a sovereign default were to occur. We believe however, that the market is reasonably neutrally positioned for the earnings season. Given that the last eight have beaten expectations, if this trend continues it could be a catalyst for a risk-on environment.
As it stands, US quarterly earnings season kicks off on Monday, with Alcoa, as usual, setting the tone for the next four weeks. The market is expecting 10% aggregate earnings and 16% revenue growth amongst S&P 500 companies, with most of the increase coming from materials and energy stocks. Growing revenues by simply cutting costs will not be tolerated this time around (not that there are too many costs to cut after two years of doing this), so we want to see companies growing organically with a positive outlook; businesses who do this will be rewarded by the market. Keep one eye on the banks, because over the last month the market has been positioned quite bearishly here, so any upside to earnings and margins could lift the broader market.
China's inflation battle
July 09
Chinese premier Wen Jiabao recently appeased markets by saying the PBOC had won its battle against inflation, and that the measures it had put in place to cool inflation were effective. July 09 will be a key date because CPI will be released to the market. Inflation is expected to increase to 6.2%, from 5.5%.
July 13
Traders will also be watching the second quarter GDP print on July 13, where growth is expected to slow to 9.3%, from 9.7%. Both CPI and GDP are seen as lagging indicators and therefore could have a limited impact. However, this date is key because according to most analysts it is expected to mark the peak in inflation with pricing pressures expected to fall back from here. Given the price action on the Shanghai Composite recently, the market seems to believe the premier, so if inflation does abate then this could be another road block removed from markets.
July 27
Keep an eye out for Australian 2Q CPI print on July 27. Given the RBA's recent dovish assessment of the Australian economy, credit markets are not pricing in any rate hikes over the next twelve months. A CPI print north of 0.7% may change this view and cause some buying in the AUD.
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Updated: 08/07/11
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