New Greece deadlines, focus more on China/commodities

2 min read
Divyang Shah

European government bonds are moving sideways this morning, despite new and likely more significant deadlines for Greece.

We have been through various deadlines and ‘this is it’ moments on Greece since February, but there does seem to be a greater sense of urgency this time round. Not only does Greece have to deliver a proposal by Thursday, but failure to do so would see a larger summit of EU leaders on Sunday focus on the next steps. But the true hard deadline is not until July 20 when the ECB payment is due and even here Greece has seven days to ‘cure’ a missed payment.

The market has become accustomed to Grexit risks and so far, the fallout has been contained.

The same cannot be said for what is happening elsewhere, where the Chinese equity market continues its fall and Asian equities in general come under pressure. The Nikkei is down 3%, falling below the 20k level, while the Hang Seng is off 8% with other Asian equities off 1.5-2.0%.

In addition to equity market weakness, we are also seeing oil/commodity prices come under pressure. While a more contagious Greece could possibly have a more significant financial market impact, what is happening in Asia/China is significantly more negative for the global growth and inflation outlook.

The repricing of Fed and BoE rate hike expectations highlights the importance of the moves. There is a 20% probabilty that the Fed will hike at its Sept meeting, while the move lower on 1y1y GBP highlights that BoE rate hike expectations are being pushed further into 2016.

For bond markets, there are a menu of supportive factors from Greece, China, to the growth/inflation outlook but positioning seems to be a lot more neutral. The market remains illiquid and it will not take much of a step up in concerns regarding any one of the above factors, to see the market back to entertaining longs beyond the flight to quality bid.

Divyang Shah