Greek citizens voted “No” on Sunday’s referendum to accept their creditor’s terms in exchange for financial aid, pension cuts and sales tax increases. As a result, media outlets immediately jumped to conclusions stating that Greece will now undoubtedly leave the Eurozone. However this is not the case, there are multiple different and very plausible options. Greece could exit the Eurozone with a desperate government and even more desperate local banks but Greece could also strike a deal with its creditors, reopen banks and stay in the Euro or even fail to reach a deal but remain in the Euro, not as a full member, and rely on local IOUs. A Greek exit from the Euro would have intense global ramifications, far more significant than what a deal with creditors would have. As of today do not buy the media hype, Europe has to keep Greece in the EU in fear of grave economic consequences. Look to Doug Cote’s view on the Greek situation and potential impact on domestic markets in this CNBC article.
The U.S. jobs report was released today, giving investors mixed feelings. Certain numbers indicate a strong economy bouncing back from a tepid first quarter while other data foreshadows an economy trapped in the same low growth trajectory. Signs of a solid job market were aided by 223,000 new June jobs and a 0.2 percent decrease in unemployment that brought the jobless rate to 5.3 percent. The new jobs added in June mark the 13th time in the last 15 months the economy has added at least 200,000 per month. However the U.S. job market did take hits from reduced employment gains, disappointingly flat wages and a record low labor force participation number. Remember that a robust job market is one of the Fed’s key indicators for raising rates and every jobs report from here on plays a significant role on when that hike will take place. Look to Employment Payrolls on page 54 and Unemployment Rate on page 55 of the Voya Global Perspectives™ book to see a detailed history of the U.S. job market.
Greek Prime Minister Alexis Tsipras is ready to talk. A two page letter from Tsipras to the leaders of the European Central Bank, the European Commission, and the International Monetary Fund stated that Greece is ready to stop the panic and willing to agree to the bailout conditions discussed this previous weekend. The letter continued to describe how Greek demands were only minor changes and would have a great fiscal impact. This willingness to compromise comes as a surprise to many as it seems as recent as last night that the Greeks were not ready to budge on key issues such as tax hikes and pension changes. A deal like this in the works supersedes the referendum planned for July 5th and makes a vote to stay in the European Union unnecessary. The optimistic news coming from Greece spread to the international futures market. All three major U.S. future indices reacted positively along with the Euro Stoxx. Look to Chief Market Strategist Doug Coté on CNBC this morning for further explanation.
All hope is not yet lost for Greece. While many believe Greece will default on its $1.8 billion payment to the IMF today after Greek Prime Minister Tsipras pushed off talks with creditors until a Sunday referendum on a bailout plan, there is still a slight chance a last-minute deal could be made. Late Monday night European Commission president Juncker offered Tsipras a somewhat sweeter deal. This offer would include a plan to reexamine Greece’s debt later this year in October in return for a “yes” vote at Greece’s critical referendum. Do not overlook this deal. Greece seemingly is stuck between a rock and a hard place with very little bargaining power, but this overlooks Eurozone’s determination to keep Greece in the Euro. Look to page 46 of the Voya Global Perspectives™ book to see Greece’s desperate economic situation.
The sudden drop in low oil prices whacked energy sector earnings and resulted in a pullback in many of the marginal shale oil projects. While the bad news had an immediate economic impact, the benefits of low oil have taken a while to work through the system. The good news is beginning to be seen in the latest consumer data. Retail sales and auto sales have really picked up in the last few months and today’s consumer sentiment reading rose to a final June reading of 96.1, a five-month high and much higher than the 86.9 average reading in the year leading up to the recession. The positive economic trend will help corporate earnings which in turn will help propel equity markets forward in the second half of the year. This bull may be old but he is still in the ring. Please follow consumer confidence on page 51 of the Voya Global Perspectives™ book.
As expected, the Greek drama is going down to the wire. Yet another creditor deadline is looming on Friday. If the entire Greece situation goes south, will it roil global markets? Of course. But Greece is a small economy, smaller than Dallas or Boston or Philadelphia, and the true economic impact is minor. However, investors will likely panic in the short term, head for the exits, and forgo opportunities. Global markets are never smooth sailing. That's why investors need a diversified portfolio which includes both stocks and bonds to ride this roller coaster without losing their lunch. See how Greece stacks up to other euro economies on page 46 of the Voya Global Perspectives™ book.
Bipartisan is practically an oxymoron but Republicans got it done for President Obama by delivering fast track authority on Trans-Pacific Partnership (TPP). The TPP will link 40 percent of the world's economy in the Pacific region and has a real chance to become a law with this increased negotiating leverage for the president. So chalk one up for the politicians but the proof is in the pudding and the President must now deliver his purported signature TPP trade deal. Please read more on the importance of global trade in Voya's Global Perspectives™ 2015 Forecast.
The MSCI EAFE Index (Europe, Australasia, Far East) is up big this year (10.4 percent as of 6/22), more than double the S&P500. Like clockwork, these high-flying returns are prompting investors to pile into this asset class and out of U.S. domestic equities. According to ICI, there were $3.8 billion in domestic equity outflows for the week of 6/10 compared to $3.6 billion in inflows to world equity, just when the U.S. economic picture is getting brighter. The consumer is the main driver of the U.S. economy. We know the jobs market is doing just fine – the best in 15 years. That’s good news for the consumer’s wage growth. Now the latest housing news is reaffirming a strong consumer foundation. According to Action Economics, new home sales have risen 102 percent from the 273k record-low in February of 2011, while pending home sales have risen 47 percent from a low in June of 2010, and existing home sales have risen 55 percent from a low in July of 2010. Today’s new home sales report of 546K was the fastest pace since February 2008. It may seem like the U.S. bull market is a little long in the tooth, but markets follow corporate earnings, not the clock, and a stronger consumer will boost earnings. Market timing works almost never. Please follow global market returns on page 38 of the Voya Global Perspectives™ book.
It looks like a positive week for the market. Greece and the Fed have been in the spotlight all week and investors may have missed an important development in the Trans Pacific Partnership trade deal. The fast track option narrowly passed in the House and is headed to the Senate. Why is this trade deal important? These Pacific countries represent 40 percent of global economic output. Opponents are worried about a loss in manufacturing jobs but nixing the trade deal will not bring back the manufacturing jobs lost to increases in productivity (worker output has quadrupled from 1970 to 2010), advanced technology and automation over the last several decades. Ninety-five percent of consumers reside outside of the U.S. so trade matters. Please follow trade with the potential TPP partners on page 42 of the Global Perspectives book.
Wait and see. Wait and see what the Fed is going to do about interest rates. That has been a common investment theme in 2015. Meanwhile, investors waiting in cash are seeing (but missing) markets touching all-time highs. The latest economic news is also pointing higher- CPI inflation moving up .4 percent in May, leading indicators higher than expected increasing .7 percent, initial jobless claims lower, and the Philly Fed manufacturing business index coming in at 15.2 – almost double expectations. ‘Wait and See’ might not be the best approach. Please follow leading indicators on page 59 of the Voya Global Perspectives™ book.