Friday, June 26, 2015

Markets uncertain over what may be another Greek bailout

Dow gained 85, decliners over advancers 5-4 & NAZ fell 19.  The MLP index slid a fraction to the 408s & the REIT index was down fractionally to the 306s.  Junk bond funds declined & Treasuries sold off with the yield on the 10 year Treasury heading for 2½%.  Oil slid back, remaining close to 60, & gold continued flat.

AMJ (Alerian MLP Index tracking fund)

CLQ15.NYM....Crude Oil Aug 15...59.09 Down ....0.61  (1.0%)

GCM15.CMX...Gold Jun 15.......1,172.20 Up ...0.70 (0.1%)

Greece’s creditors offered to unlock aid of as much as €15.5B ($17.3B) for the indebted country, as Prime Minister Tsipras lamented the tough conditions (?) demanded in return for the deal.  With Greece’s bailout set to expire, creditors have proposed a 5-month extension thru Nov, a European official said.  The proposal, which was presented to a euro-area finance ministers meeting yesterday, is dependent upon the Greek gov committing to prior actions to implement economic measures.  Finance chiefs will meet again tomorrow to try & hammer out agreement on those steps, with sticking points including sales-tax rates & pensions.  Tsipras told Angela Merkel & French pres Hollande that his gov couldn’t understand why the country’s creditors insisted on harsh austerity measures.  “Whatever the package, it remains a very difficult one for prime minister to sell it, and that is the issue,” Malta’s Finance Minister said.  The standoff has prompted warnings that capital controls are possible as soon as Mon if a deal remains elusive after this weekend’s talks.  Merkel told reporters that euro leaders “agreed that everything must be done to find a solution on Saturday.”  Hopes of a deal were first raised, then dashed, when Tsipras came to Brussels earlier this week with a set of proposals that were welcomed as the first credible plan from his gov, only to push back when more cuts were demanded.  The proposed package foresees payouts to Greece of €8.7B from the European Financial Stability Facility, €3.5B from the IMF & €3.3B in central-bank profits on bond purchases.  Of the €3.3B in SMP profits, €1.8B would be paid immediately.  The Greek impasse is hanging over a European Union summit which was slated to discuss Europe’s immigration crisis & the UK's drive to hold a referendum on EU membership.  Rather than clinch a deal on Greece during the 2-day gathering, euro-area leaders refused to discuss it in detail that only exposed the confusion & frustration at play.  With no follow-on financing in place, Greece may struggle to pay €1.5B ($1.7B) it owes the IMF at the end of the month.  Failure to close a deal by the weekend raises the odds that Greece might have to impose capital controls to prevent a run on its banks.  Greeks have withdrawn about 20% of deposits held by the nation’s lenders this year as concern of an exit from the euro intensified.

Greece's Creditors Offer $17.3 Billion Package to End Standoff

Speaking of bailouts, Ukraine reiterated its threat to halt interest payments to force creditors to accept a writedown, escalating a verbal battle that’s hindered progress in a $19B restructuring.  The 2 sides traded barbs this week before a meeting in DC with the IMF on Tues that Ukraine’s main debt envoy hopes will show bondholders how dire the nation’s economic outlook is.  A creditor group owning $9B of the nation’s debt argues its being saddled with an unequal burden to generate savings for the war-ravaged nation.  The divide is increasing the risk that Ukraine will impose a moratorium on interest before its next one comes due on Jul 24, triggering a default that will probably unfold.  Skipping payments threatens to make it harder for Ukraine to tap intl bond markets in 2017, an assumption built into the IMF’s $17.5B loan for the country.  The country paid a coupon this week due to Russia, which has said it will take the country to court if it reneges on the $3B note coming due in Dec.  Talks in DC are meant to ensure all sides understand “the reality of Ukraine’s situation,” the debt envoy said.  “The structure of the economy is physically destroyed. We cannot rebound quickly.”  Conflict with pro-Russian separatists in Ukraine’s easternmost regions sent GDP into tailspin & drained reserves, leading the IMF to downgrade its forecast for this year’s recession to 9% last month.  The fund’s worsening assumptions were built into a proposal the gov sent to creditors last week for a 40% writedown & pledging to return some of those losses should the economy rebound.  Bondholders said this week they hadn’t been provided the new forecasts.  Finance Minister Natalie Jaresko blamed creditors for failing to contribute to the nation’s recovery as the IMF disburses aid & official lenders pledge $7.2B.  She’s prepared to skip payments “until an acceptable deal is agreed.”

Ukraine Repeating Default Threat Shows Impasse Far From Over

Consumers are very optimistic about the economy this month.  The University of Michigan final Jun sentiment index came in at 96.1, better than the preliminary reading of 94.6 & well above the end-May level of 90.7.   But the index had reached an 11-year high of 98.1 in Jan.  The forecast was the end-June index to stand at 95.0.  "Consumer spending will remain the driving force of economic growth in 2015. Overall, the data indicate growth in consumer spending of 3.0% in 2015," said Richard Curtin, chief economist at Michigan's Survey of Consumers.  He said the increase in sentiment so far this year was evident across all income categories.  This month's final current conditions index increased to 108.9 from the end of May reading of 100.8 & the expectations index advanced to 87.8 from 84.2.  Despite the rebound in gasoline & egg prices, consumers have a muted view on inflation.  According to the survey, the one-year inflation expectations for all of Jun fell to 2.7% from 2.8% for all of May.  Inflation expectations covering the next 5 years slowed to 2.6% from 2.8%.

Greece sort of got its bailout extended although nobody is talking & more meetings are scheduled for tomorrow.  This was originally leaked as Greece debt was extended but now the situation is clear as mud.  As I have been predicting for some time, the solution will go down to the last minute.  Based on what has been leaked so far, the best outcome for Greece is extending due dates for a few months.  However that is not a final solution & with a gov that is not committed to austerity, it's difficult to see where the debt mess is going.

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