Market commentary: Greece and the markets

Once again the attention of investors will be focused on Greece and its desperate run against time to secure a financial aid deal that would avert the country’s default next week. Important and encouraging steps have been taken by the Greek government over the past two days, indicating that the troubled country is finally willing to end a five-month standoff by accommodating the main requests imposed by its international creditors.

Greek Prime Minister has presented a new proposal that includes compromising reforms aimed at generating new revenues for the state, while tackling controversial welfare items such as pensions and additional taxes.

Officials involved with the ongoing negotiations mentioned that the new proposal contains fiscal measures aimed at increasing sale taxes, rising income taxes on middle to high income individuals and introducing a levy on companies having a net income exceeding €500,000.

The latest proposal comes ahead of a pivotal emergency meeting of the EU Finance ministers, but despite the progress represented by the new plan submitted by Greece, a lot of details remains to be discussed and formulated.

Yesterday several major players involved in the negations have expressed optimism for the progress achieved and the willingness to reach a convincing deal displayed by the Greek government. IMF’s Director Christine Lagarde stated to its executive board that she expects a full repayment of the €1.5 billion due to the Fund on June 30th, and Spain’s Prime Minister Mariano Rajoy said that he is convinced that a satisfying agreement will be reach within a few days.

While policy makers have not yet finalized an official agreement, markets have reacted positively to the ongoing developments surrounding Greece, with equity markets rebounding across the globe and Greek stocks trending higher after weeks of declines. The Athens Stock Exchange Index gained 3.93% on Tuesday, after surging as much as 8.12% on Monday.

European equities also rebounded posting gains for four straight days, with the Euro Stoxx 600 Index gaining 3.8% over the past three trading sessions and positioning itself to open higher this morning.

The German Dax Index also showed a resilient performance over the past couple of trading sessions booking gains for 3.81% on Monday and 0.74% yesterday, opening flat this morning ahead of the important EU meeting scheduled for this afternoon. US stocks, although trading in positive territory have posted more contained gains with the main US equity indexes increasing between 0.68% and 0.87% over the last two trading days.

Overnight, Asian equites traded higher, extending gains recorded earlier this week, with the Japanese’s Nikkei 225 reaching highs unseen since 1996, and passing the 20,434.68 psychological level recorded in the 2000.

European bonds are also being positively affected by the widespread optimism on Greece, with yields on the large majority of EU sovereign 10-Years papers declining across the board.

Despite the optimism that a Greek deal is closed to be defined, any agreement will still have to pass parliamentary approval both in Greece and Germany.

Therefore markets and investors are asking themselves: will the Greek anti-austerity parliament’s majority ratify a compromising deal that affects pensions, salaries and new taxes, or will Greece have to, once again, call a snap election? And should this scenario materialize, would Greece manage to form another government before an important ECB repayment due on July 22nd?

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.