Wednesday, October 15, 2014

A Greek sense of Déjà vu | Retail sales bring US dollar reverse

In what must a disturbing development for the ECB and the IMF, the Greek government has informed the so-called troika, composed of those bodies along with the EU Commission, that it will not require to complete the rescue programme that was put in place in order to stave off default by that country only a very short time ago.

The reason it wants to forego any further loans under the plan seems to centre on the rise in Greece of an anti-EU opposition party, which is promising an early end to the austerity that came as a condition of the bailout, even if this results in a break with the Euro.

Greece contends that from now on it will be able to fund its requirements from the bond market. There is only one problem here: Yields on Greek government debt have been soaring on the news of the government’s intention to exit the rescue programme. This is at a time when yields on all other government bonds worldwide have been falling precipitately. US government debt is now so cheap that market commentators have seen it as a sign that the Federal Reserve will be forced to greatly delay interest rate rises after it had signaled that they would rise next year (bond yields can be seen as a proxy for core interest rates).

Mario Draghi commented that if Greece was not under the supervision of the ECB as part of the rescue programme, then its banks would not be eligible for the Asset Backed Securities (ABS) purchases that the central bank is putting in place. Greek bank debt currently has junk-bond status.

Is this the forerunner of another Greek Euro crisis?

Retail sales results bring US doller reverse

Talk of the bond market signaling a postponement of interest rate rises stateside was always going to affect the recent strength of the US dollar. And indeed there was a plunge in its value against its global counterparts yesterday. The catalyst was the poor reading of retail sales figures from the USA.

Only time will tell if this is a temporary correction in greenback strength or whether it is something more significant. In the meantime hard commodities, most notably oil, continue to head south, as do the world’s stock markets. Interesting times.

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