Market commentary: Yellen says US economy still on track, Greece reaches bailout agreement

While investors were mainly focusing their attention on Greece and the ongoing Chinese stock market rout, last Friday, Federal Reserve’s Chairwoman Janet Yellen delivered here first public speech since the latest FOMC meeting.

After days of turmoil on the markets over the large and sudden decline in Chinese stocks and Greece’s missed payment to the IMF following the breakdown of negotiations over a new bailout agreement, Yellen reiterated her conviction that the US economy is on track, despite the external shocks that have recently rattled traders and investors alike.

The FED’s Chairwoman, in a speech in Cleveland, confirmed her view that economic indicators are improving and that she expects that the US Central Bank will be rising its interest rate benchmarks before the end of the year.

Although a final decision continue to be linked to inflation, wage growth and economic expansion, Yellen reinforced market’s expectations that the FED will be enact its first interest rate hike either in September or December this year by stating, “I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy”.

While the large majority of analysts surveyed by Bloomberg are still betting on the anticipated hike being trigged in September, analysts at Morgan Stanley and Goldman Sachs are forecasting a formal decision being taken in December. Although Yellen did not added much to the already known stance of the Federal Reserve, she did somewhat hint that the FED remains more focused on domestic fundaments rather than event-driven effects such as a possible Greek default or a Chinese stock meltdown.

In truth, over the past few weeks US did witness improvements across various economic indicators, such as solid job additions, gains in the housing market and positive manufacturing data, however, some weakness remains in the labor market and production output.

The main three drags on the FED’s decision to undertake the anticipated interest rate are: the potential negative impact of a strong dollar, the sizable decline in oil related investments and activities and the slow path of wage growth and inflation.

The latter in particular is at the center of the Federal Reserve’s cautiousness as wages have only grew about 2% over the 12 months, highlighting a slack in the labor market, despite unemployment reaching its lowest level in more than seven years.

In Europe, markets were pleasantly surprised this morning when Donald Tusk, President of the European Council, announced that after 17 hours of negotiations an agreement between Greece and its creditors had been finally reached.

While details of such agreement are still to be released, it appears that Greece has given in to almost all creditors requests and it has secured the initiation of a bailout package negotiation conditional to the immediate implementation of key reforms to be passed by the Greek Parliament before Wednesday’s deadline.

The developing news, released at the opening of European markets, has galvanized investors, prompting them to hit the “BUY” button fueling a rebound across the board.

All major European equity indexes traded over 1% higher at the beginning of the session, with the Euro Stoxx 600 Index gaining about 1.5% an hour an half into the trading day. European Sovereign bonds have been swinging between losses and gains so far this morning, while equity futures are pointing to a strong opening for US stocks that are likely to follow European markets in positive territory.

With an officially agreement on the table, the main question now is: will Greek Prime Minister be able to pass the necessary reforms to unlock the much needed new bailout funds despite having alienated part of its own party?

This article was issued by Paolo Zonno, Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.