Merkel bemoans EUR strength

The Day So Far

Caution reined across markets this morning, following reports yesterday that the IMF had pulled its negotiating team from Athens. This is a move designed to put pressure on the Greek Government to cave in to some of the creditors main demands regarding the primary budget and key labour and pensions reforms. Talks between Tsipras and the European Commission’s Juncker ended in acrimony yesterday, after Juncker felt Tsipras reneged on their initial agreement sketched out last Wednesday, the basis of which Juncker had intended to present the European leaders and the IMF with. Therefore, we remain back at square one with just three weeks left to thrash out a deal. This news, which had disturbed the sharp rebound enjoyed by equities over the last couple of sessions, caused the skittishness seen this morning, with the euro dipping below the 1.12 handle and the Dax sliding back towards critical 11,000 support. In volatile trading, equities then swiftly retracing after a German finance Ministry spokesman said that contrary to yesterday’s reports, the IMF didn’t terminate its negotiations with the Greeks. Elsewhere, German Chancellor Merkel admitted her frustration with the strength of the euro, saying that it made it harder to introduce reforms in the peripheral countries. The euro fell accordingly before retracing on the IMF denial.

The Afternoon View

This afternoon is relatively quiet, the University of Michigan Consumer Sentiment survey at 15:00 BST the notable highlight. We also have inflation data out from the US, with PPI Final Demand for May due at 13:30 BST, but with the calendar on the light side, we anticipate cautious markets going into the weekend. We retain our long bias for equities but remain short the euro versus the dollar, although it is worth noting just how resilient the euro has been despite the numerous challenges in recent days. Over the past week we have witnessed last Friday very strong NFP report, solid US retail sales and the latest breakdown in talks between the Greeks and their creditors, yet the dollar is struggling to gain any traction. Perhaps traders are still expecting a positive outcome to this Greek drama and have discounted this week’s strong data to make any difference regarding the Fed’s intentions for the first rate hike.