Cautious optimism after Greece agreement

The Day So Far

After a very tense weekend of negotiations between Greece and the creditors, details of a unanimous agreement finally emerged just before the European open. Initially, a deal looked to be dead in the water on Sunday afternoon as German Finance Minister Schauble corralled his counterparts into producing a tough four page document to submit to the Eurogroup leaders’ meeting later that day. This document included very strong reforms, the creation of a 50bn euro fund of Greek state assets to be privatised, as well as the option for a temporary Grexit for 5 years from the monetary union if the Greek Parliament voted against it. The subsequent leaders’ meeting paused shortly after it began so key leaders could hold private talks, particularly Merkel, Hollande and Tsipras, whose meeting was described as ‘extensive mental waterboarding’ for the beleaguered Greek PM, according to one top official. Finally, after 20 hours of talks through the night, the proposal to Greece was softened slightly at the behest of France, and crucially it is a substantially worse deal than that rejected by the Greek people at the referendum. Quite simply, Tsipras, after months of bluffing and brinkmanship, has finally been broken by the creditors, and now has to pick himself up this week to find a way to persuade the Greek Parliament to support the proposal by Wednesday for the negotiations for full ESM funding to begin. In the meantime, there is yet another Eurogroup meeting today at 14:00 BST to discuss bridge financing for the Greek banking sector until a deal is completed.

The market reaction was one of cautious optimism, the knowledge that one of the key risks hanging over markets has been immediately removed, tempered by the uncertainly whether the Greek Parliament will indeed ratify the proposal. The Dax climbed above 11,500 for the 1st time in July and the Bund falling sharpely lower below the 150 handle before retracing. The ball is now firmly in the court of the Greeks; if it passes Parliament then there is definitely room for European equities to return to their highs for the year, until then we expect mildly risk-on sentiment.

The Afternoon View

Today is on the quiet side in terms of data, with markets likely driven by events in Athens and whether Tsipras can manage to gain enough support in Parliament in the coming days. The euro is a tough call on this one; initially spiking on the news of a deal but then dropping over 100 pips. This reaction suggests that markets are starting to think about the next big event, namely the Fed policy and potential for rate rises beginning in Autumn. Therefore, we continue our short bias for the euro, even though it might see a lift if there is positive news out of Athens on Wednesday.