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Highlights
HILSENRATH'S TAKE: FALLOUT CONTAINED SO FAR FOLLOWING GREEK DEFAULT
It is still early days and much can change, but the broad financial market fallout from Greece's default on loans from the International Monetary Fund looks initially contained.
European stocks rose Wednesday on investor hopes for a deal between Greece and its creditors. European stocks are up strongly for the year despite volatility and sharp declines early in the week. The STOXX Europe 600 index was up 1.5% midway through trading Wednesday and is up 12% for the year. U.S. stock prices stabilized Tuesday after sharp selloffs Monday.
Taken together the action doesn't look like the kind of forced and cascading selling that typically happens in the kind of panic that a Greek default might provoke.
Importantly, bond market movements are also contained. The yield on 10-year Spanish government bonds, at 2.218%, has risen from 1.517% at the beginning of the year, but remains well below levels that exceeded 7% three years ago. Italian government bond yields have also risen, to 2.244% from 1.727% at the beginning of the year, but they are likewise below levels that exceeded 6% three years ago. Yields on Portuguese government bonds are near 3%. In short, countries prone to fallout from a Greek default appear to be in a position to continue to fund themselves.
The spread in yields between German government bonds and Italian and Spanish bonds -- a signal of investor risk aversion -- has widened, but is nowhere near as wide as it was three years ago. These spreads get bigger when investors flock toward safe haven assets. Yields on U.S. 10-year notes also tend to drop when investors flock to safe haven assets. U.S. 10-year yields are little changed in the last week, volleying between 2.25% and 2.5%. They have risen from below 2% in April. Again, no sign of panic.
Much can still go wrong. The agreement investors hoped for Wednesday could fall apart and Greece could move toward a messy separation from the euro-currency area, setting off wider worries about the stability of Europe. At this point in time, however, the banking and investment community appears to be prepared for events as they are playing out.
-By Jon Hilsenrath
MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD
Fischer: Rates to Increase Gradually. Federal Reserve Vice Chairman Stanley Fischer said Tuesday speech Fed policy makers are on track to raise interest rates "when we have seen further improvement" in the labor market and inflation. Mr. Fischer said the U.S. labor market has been slowly improving but still has a way to go before the economy reaches full employment. And, while inflation remains below the Fed's 2% target, officials believe it will rise to that level "within about two years," he said.
Fed's Bullard Shrugs Off Greek Events, Points to Chance of Sept Rate Increase. Federal Reserve Bank of St. Louis President James Bullard said Tuesday Greek economic problems are unlikely to affect the U.S., leaving the Fed on track for rate rises later this year. What's happening in Europe "would not change the timing of any rate hike. I would say September is still very much in play" for raising rates, Mr. Bullard told reporters after a speech in St. Louis. In his speech, Mr. Bullard warned that very low interest rates could create problems in the financial system, and suggested that in the future the U.S. central bank may need to set short-term rates at higher levels than would normally be the case to mitigate those risks.
Greece Defaults on IMF Loan Despite New Push for Bailout Aid. Greece became the first developed country to default on the International Monetary Fund, as the rescue program that has sustained it for five years expired and its creditors rejected a last-ditch effort to buy more time.
What's the Timetable to a Grexit?
Five Possible Currency Arrangements
Praet: ECB Ready to Respond to Disruptions. European Central Bank chief economist Peter Praet said Tuesday that should economic conditions in the eurozone worsen, the ECB would be ready to launch additional monetary policy easing. "Building on our past record, the public knows that the ECB is determined to respond to disruptions in the monetary transmission mechanism that would affect our price stability objective," he said. "We would make full use of the flexibility afforded by the measures already in place and activate other policy instruments if necessary." -- Dow Jones Newswires.
ECB's Nowotny Adds Pressure on Greece. ECB Governing Council member Ewald Nowotny added to pressure on Greece to pass a referendum on reform packages proposed by European creditors, hinting that a Greek failure to do this could ultimately lead to the ECB cutting off the emergency funding that has kept Greek banks afloat in recent months. "I don't want to speculate but it is quite clear that if the proposals made by the European institutions are turned down then we will not have much room for negotiation," he said. -- Dow Jones Newswires.
Bank of England Warns Greece Threatens Financial Stability. The Bank of England on Wednesday said the outlook for financial stability in the U.K. has worsened in recent days as the crisis in Greece intensifies. The BOE said in its twice-yearly Financial Stability Report that the risks associated with Greece and its failure so far to reach a deal with its international creditors have grown "acute," and threaten to trigger a selloff in financial markets that could ripple through to the wider global economy.
Proportion of Euros Held in Foreign-Exchange Reserves Declines. The proportion of euros held in official foreign-exchange reserves dropped in the first quarter, suggesting that central banks allowed their allocation of the single currency to decline amid negative interest rates in the eurozone.
China Looks to Stem Market Rout. Chinese regulators are digging through their playbook to prop up a floundering stock market as fears of a market collapse are taking priority over other economic concerns. A further selloff in stocks would hurt Chinese companies' ability to raise funds and pay off debt, which, in turn, could add more downward pressure on the economy.
Turkey's Central Bank to Reduce Commission Rate on Euro Accounts. Turkey's central bank said Tuesday it will reduce its annual commission rate on euro-denominated accounts held with the central bank, citing the recent developments in the eurozone. The central bank announcement came after Greece on Monday closed its banks for six days, and Greece's central bank moved to impose capital controls to prevent money from flooding out of the country after negotiations between Greece and its creditors broke down over the weekend. -- Dow Jones Newswires.
GRAPHIC CONTENT
The Downside to Margin Lending. Some of the biggest losers in the current Chinese market slump are companies with a relatively small portion of their shares freely traded, many of them bought using borrowed money. Because the government or holding companies own the majority of shares in many businesses, the free float, or number of shares that trade on the market, is relatively small for lots of Chinese stocks.
FORWARD GUIDANCE
-ECB holds a non-monetary policy meeting in Frankfurt
-National Bank of Georgia releases a policy statement
-Bank of Albania releases a policy statement
RESEARCH
Nominal Income Targets. In a Cato working paper, Joshua R. Hendrickson and David Beckworth look at the argument that Fed asset purchases should be tied to a nominal income target. "This paper proposes a mechanism in which monetary policy works through current and expected growth in the supply of transaction assets and nominal income expectations. Empirical results focusing on the role of nominal income expectations provide support for the theoretical framework," they write. As a result, they conclude, there is "some support for conducting quantitative easing with an explicit nominal income target."
COMMENTARY
China, Greece and Puerto Rico: Not Yet Contagious. The Journal's Greg Ip writes that the risks to the rest of the world from the three ongoing financial upheavals are limited. "The good news is the channels of contagion are much weaker than when the U.S. mortgage bubble burst in 2007 and Europe's sovereign debt crisis first erupted in 2009.That does not mean the world will be spared. Some consequences from all this unrest may only become apparent in coming weeks and months," he writes.
The Future of Emerging Markets. In a post on Project Syndicate, economist Laura Tyson argues that investors should not flee emerging markets once the Fed raises rates. Investors "should remember that, for these economies, the wave of industrialization and urbanization and the associated productivity gains are far from over," she writes. "With their faster-growing populations and productivity, they will enjoy a growth advantage over developed economies for some time to come."
BASIS POINTS
Consumer Confidence Jumps. The Conference Board, a private research group, said its index of U.S. consumer confidence jumped to 101.4 in June from a revised 94.6 in May. http://www.wsj.com/articles/u-s-consumer-confidence-jumps-in-june-1435674170
Home Price Growth Flattens. The S&P/Case Shiller Home Price Index, covering the entire nation, rose 4.2% in the 12 months ended in April, weaker than a 4.3% increase in March.
Canada GDP Drops. Canada's economy shrank for the fourth straight month in April as slumping crude-oil prices continued to weigh on the economy.
(MORE TO FOLLOW) Dow Jones Newswires
July 01, 2015 07:06 ET (11:06 GMT)
Romania's central bank kept its main monetary policy rate unchanged at 1.75%, as fears over a possible Greek exit from the eurozone outweighed the extremely low inflation prospects--Dow Jones Newswires.
Hungary Central Banker to Resign. One of Hungary's nine central bank rate-setters, Csaba Kandracs, will resign from his post July 6 and parliament's economic committee is scheduled to nominate his replacement on Wednesday.-- Dow Jones Newswires
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(END) Dow Jones Newswires
July 01, 2015 07:06 ET (11:06 GMT)
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