June 19th 2011: Weekly market preview - Major banks not buying Greek rescue plan
The start of the new week is again likely to be dominated by Greece and the threat of a debt default with markets needing to monitor a multitude of angles to assess the true picture. The overall risk profile strongly suggests that selling Euro rallies is the best approach.
The most likely outcome is that the IMF and Euro-zone will pledge to pay the latest loan tranche and agree in principal a fresh rescue package for Greece. Euro-zone and IMF officials will meet over the next two days to shape the second package which it is reported could be worth at least a nominal EUR100bn and could be as much as EUR150bn. Such a deal will provide immediate relief and support the Euro to some extent even though its foundations may well prove to be built of sand.
The focus then will be on how long it takes the plan to unravel in the face of relentless market pressure and the huge political obstacles. The net risks suggest a further limited Euro rally, possibly to the 1.45 area against the dollar, followed by renewed and probably heavy selling pressure.
The Greek government with its reshuffled cabinet is scheduled face a no-confidence vote on Tuesday. The maths are still far from convincing, but the new cabinet should be able stem defections and win the vote. Notionally it would then have parliamentary approval for the austerity package, but there will be further substantive protests within Greece and the government will not actually be able to deliver on its promises. There will also be strong political criticism of any package within Germany and it is a possibility that the German government could collapse.
Wholesale money-market trends will also need to be watched extremely closely over the forthcoming week. There has been increased evidence of capital withdrawals from the Euro-zone and evidence that key banks are cutting inter-bank funding and credit lines to Euro-zone banks due to fears over deteriorating conditions within the Euro-zone. This is an extremely worrying trend as any credit crunch would soon trigger banking failures and push the Euro into freefall given that many institutions are already totally dependent on ECB funding.
There will also be an important risk of contagion, especially with the Spanish banking sector, for example, already under intense pressure while there are key vulnerabilities in Italy, illustrated by Friday’s credit-rating downgrade threat.
Fed Chairman Bernanke should be able to regain the limelight, at least temporarily, on Wednesday as he will hold his second press conference after the latest FOMC statement and interest rate decision. Bernanke is likely to confirm the end of quantitative easing at the end of this month, although there will be a re-investment of proceeds to keep the overall total steady. Given the recent run of economic data it will be very difficult for Bernanke to sound more optimistic over the economic outlook. Of critical importance, will be whether the Fed chief makes any hints over the possibility of further quantitative easing within the next few months if the economy weakens further. If he does, then the dollar will take another big hit.
The Bank of England June MPC minutes will also be released on Wednesday, the first meeting since arch-hawk Sentence’s term on the committee ended. This should cut the number of members voting for an increase to two and Sterling will come under fresh pressure if Weale was left in isolation to push the case for an immediate increase in interest rates.
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