The ongoing ‘deal or no deal’ saga has kept most asset markets on edge, as rising uncertainty spooks investors…..
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We expect that volatility will begin to stabilise once we have greater clarity on the scope of a bailout and the conditions attached. To that end, we do not expect a ‘Grexit’ and feel that the ECB will stem any potential run on the Greek banking system via the ELA. Notwithstanding a stronger USD, gold appears well placed to add to recent gains the longer the Greek negotiations are drawn out, with benchmark equities already rebounding as investors appear to expect a near-term resolution.
Precious metals stage comeback as Greek negotiations falter. Precious metals began to show their mettle, responding to the prolonged standoff between Greek officials and the Troika last week. Gold and silver led the way, their value to investors as monetary metals coming to the fore. While these gains could be unwound in the near-term if an agreement is reached, we expect further modest gains in coming months as the ECB and other major central banks continue down the money printing path. Meanwhile, El Niño continues to be the question mark for agricultural markets, potentially threatening both wheat and sugar supplies in H2 2015. Cocoa gained a further 6 % last week, as a tighter supply from Ghana and El Niño fears continued to support the market. However, grind demand has also been somewhat weak and could threaten the price bullish sentiment.
Rollercoaster ride continues for China A-shares. After MSCI announced that it would continue to keep the China A shares inclusion under review, focus has again turned to the amount of unwanted leverage in Chinese stocks. A crackdown by regulators on unauthorized margin lending has been the latest setback for China A shares, sending them tumbling over 6% last week. Despite the volatility, we expect further gains in the medium term, with valuations in line with historical averages and significant market cap growth potential. Meanwhile, volatility was a feature for European bourses also as they rebounded, tracking US benchmarks higher, as the threat of a Greek exit fades.
Euro defies potential of Greek exit. The market view on EUR/USD is becoming increasingly polarized, with some expecting gains in the face of rising volatility. We expect downside risks to come more into play and would feel any near-term rally as an opportunity to establish short positions. Optimism over a Greek deal is weighing on the Euro in early trading. The FOMC meeting last week was interpreted relatively dovishly by the market and began the decline for the US Dollar, and coupled with investment flows that supported the Euro, it was one-way traffic last week. However, as concern over the Greek sovereign situation begins to stabilise, investors are again likely to focus on the fundamentals and the relative strength of the US economy. Current market pricing is indicating further USD strength against most G10 currencies this week. GBP has also been buoyant and we expect this to continue with evidence of rising wages raising expectations of tighter policy from the Bank of England. Last week’s retail sales data also surprised to the upside, highlighting the health of household balance sheets.