ECONOMETER

Once again Greek worries are hogging the limelight and although the Greek saga has become a rather tedious affair for markets, concerns are well founded.  The latest issue is whether Greece is willing to adhere to potentially tough measures that would be associated with IMF assistance for the country.  Latest speculation suggests that Greece may side step the IMF to avoid such measures though this was belatedly denied by the Greek authorities. 

Given the huge amount of bonds Greece needs to sell over the coming weeks renewed nervousness does not bode well for a good reception to this issuance. As it is financing costs are rising once again in the wake of a renewed widening in Greek sovereign bond spreads and servicing this debt will add to the economic misery.  Greece has little by way of upside over coming months and years.  Tough and necessary austerity measures mean that sharp growth deterioration is inevitable, deepening recession.

The lack of flexibility for Greece to devalue its way out of its quagmire means much more economic pain with no release valve.   The same applies to the likes of Spain and Portugal.  The overall loser will be the EUR which looks likely to succumb to further weakness in the months ahead; the parity trade remains a prospect. Perversely a weaker EUR may be exactly what is necessary to alleviate some of the pain for Southern European economies though the EUR would need to weaken by much more than we forecast to be of much help.   

Aside from Greek gyrations the overall market tone looks somewhat positive.  The Fed’s dovish minutes of its March 16 meeting in which it marginally downgraded growth and inflation forecasts, highlights that interest rates are unlikely to be raised by the Fed this year. This will keep in place an accommodative policy stance conducive to further improvements in risk appetite.     Moreover, data releases such as the US ISM manufacturing and non-manufacturing surveys, have been generally supportive to recovery,

Easing tensions on China/US exchange rate policy have also helped sentiment as the issue has been put to one side after the US administration delayed the decision whether to officially label China as a currency manipulator.  Pressure from the US Congress suggests that the issue will not be on the back burner for long and the issue of CNY revaluation will likely be a topic at the during the various meetings between US and Chinese officials over coming weeks. 

Nonetheless, the delay in the US Treasury report will work in favour of a Chinese currency revaluation sooner rather than later as China will likely react more favourable to less international pressure to revalue.