25 May 2018
Greece: Moving towards the exit

Greece will rush to implement reforms and negotiate debt relief over the next few weeks, as it prepares for the Eurogroup's next meeting on 21 June, and the end of its third bailout programme in August  

Final rush of reforms to exit the rescue programme

Thursday's Eurogroup meeting shed some light on the staff-level agreement (SLA) that was reached between Greece and institutions in the fourth review of the third bailout programme. This will involve an additional package of reforms, which will be implemented in the coming weeks. As confirmed by the EU Commissioner Pierre Moscovici in the press conference, the aim is to form an agreement on the terms of Greece's rescue-plan exit when the Eurogroup next convenes on 21 June.

Italy: Conte gets a challenging mandate

After 80 days of stalemate, President Sergio Mattarella has mandated Giuseppe Conte to form a government. But the choice of the finance minister will tell us more about how challenging the 5SM/League alliance will be for Europe 

On Wednesday evening, President Sergio Mattarella gave Giuseppe Conte, a professor of law and a civic lawyer the mandate to form a new government backed by the anti-establishment Five Star Movement and the right-wing League. Professor Conte, who had been confirmed earlier in the day by Luigi di Maio, the Five Star leader and Matteo Salvini, the head of the League as their preferred candidate, accepted with reservation.

OPEC oil cuts: To continue or not to continue, that is the question

The oil market has rallied on the back of US sanctions on Iran, and Venezuelan production declines. We believe OPEC will formulate an exit strategy at its June meeting given the growing risk of demand destruction at current prices, along with increased pressure from key importers

It is fair to say that OPEC and its allies have achieved their job in bringing global crude oil inventories more in line with the historical average and, in the process, pushing ICE Brent back up to US$80/bbl. Not all of this credit can go to OPEC, however, with US sanctions on Iran and Venezuelan production declines clearly providing a helping hand.

Regardless, the question everyone wants answered is whether OPEC will scrap its current production cut deal. Uncertainty around Iranian and Venezuelan supply does offer OPEC a good opportunity to start implementing an exit strategy.

300bp emergency hike from Turkey

The Central Bank of Turkey (CBT) has responded to today's 5% fall in the Lira with an emergency 300bp hike in the Late Liquidity Window rate. Earlier, investors had feared policy paralysis ahead of June 24th elections and that Ankara was in no mood to break the vicious spiral of a weaker Lira and higher inflation.  Expect some temporary stability in the Lira.

CBT responds to market pressure.

The CBT has surprised the market with an aggressive 300bp hike in the Late Liquidity Window (LLW) taking the LLW rate to 16.50%. Most liquidity is provided through that window currently, such that the effective cost of funding should also rise by around 300bp. In the accompanying statement the CBT said:

'Current elevated levels of inflation and inflation expectations continue to pose risks on the pricing behavior. Accordingly, the Committee decided to implement a strong monetary tightening to support price stability.   Tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement.'

In fairness, the market had been expecting this (albeit a smaller) move several weeks ago and the delay has probably caused the CBT to deliver a larger hike. Clearly, external conditions have also deteriorated over recent weeks, with Turkey suffering from: i) the stronger dollar and higher US interest rates impacting the FX borrowing costs of corporates and ii) higher energy costs exposing Turkish energy dependencies.

The timing of today's move comes on the back of the near free-fall in the Lira, initially in Tokyo as Japanese retail traders exited and then through Europe when no policy response was forthcoming.  

ECB pre-preview: New complications on the road to taper

Even though we still have three more weeks to go before the next ECB meeting, recent developments clearly signal doing nothing and buying time in June is the best and most risk-free option 

On 14 June, the ECB will hold its next monetary policy meeting. 

Until now, the ECB has been very tight-lipped about the next steps for monetary policy, particularly quantitative easing (QE) beyond September this year. With a fresh update of staff projections, the ECB could have sufficient substantial input to unveil first details of the next QE steps at the June meeting or so many market participants at least say. The reality, however, could look differently. In our view, new uncertainty on the back of weaker economic data, higher oil prices and Italian politics argue in favour of buying more time.

Why markets could be massively underpricing US rate hikes

Just who's telling the truth, business and consumer surveys or actual activity data? Since Trump's victory, they've diverged dramatically. If we're wrong and the real data starts to reflect the surveys, the path of rate hikes is being massively underpriced

Relationship breakdown

President Trump's promises of tax cuts and reduced regulations with a broad "America First" agenda buoyed both business and consumer sentiment in the wake of his November 2016 election victory. Unfortunately, while actual growth numbers have been very respectable, the situation hasn't been quite as good as the surveys would have historically suggested. 

For example, the ISM manufacturing report has been a great guide to the likely pace of overall US economic activity for much of the past 60 years. However, GDP growth is nowhere near the 6% rates the ISM was suggesting possible. Both GDP growth and the ISM survey have moved lower recently, but even so, the US is growing at less than half that rate the ISM survey historically would have suggested.

Reading time around 5 minutes

In Case You Missed It: Why June’s the month to watch

The ECB meets, OPEC evaluates its production cuts, Greece holds final bailout talks with Europe and the Swiss vote in a referendum that could upend the global banking system. It's all happening in June and we've got the lowdown on what to expect

In this bundle