IMF gives up on Greece, the EU to fight alone

IMF gives up on Greece, the EU to fight alone
By Ipek Ozkardeskaya

As the IMF steps away from talks, Germany is nearly left on its own. Greece and the EU have hard time finding a common ground as Greek PM Tsipras rejects all proposals. The leaders are running out of patience as Greece refuses to respond to German efforts to seal a deal. At this point, Greek default would no more be an accident but a choice.
Germany and the ECB are preparing to deal with the possibility that Greece’s banking system will sink like Titanic. The first jump-ship should trigger sizeable tailwinds in the Eurozone sovereigns and in euro. There should be a serious accumulation of stop orders as euro long positions were certainly not built without downside protection over the past two weeks.

Risk of contagion

The risk of contagion depends on the severity of damages that will be taken by Greece following a potential default and an exit from the euro. The Greek saga reached a level of complexity that keeps it well separated from the bulk of Eurozone’s peripheral countries.
The risk of contagion is therefore limited. The Greek sacrifice could be a warning for the rest of the monetary union however, and power up other peripheral members’ efforts to avoid a Greek type of drama.

In a lower probability scenario, a Grexit could also be a wake-up call for all countries facing and standing against the austerity measures imposed by Germany. This is what we would call a contagion risk. In such scenario, Eurozone would even face existential questions.

Looking at euro levels, the market is clearly not pricing a contagion scenario at this level. There is no significant sign of panic in the market. There seems to be more chance for Greece to walk out quietly. And the life will go on.

Euro

Whether the euro is tired to swing on Greek talks or a Grexit has been reduced to a minor event, euro holds ground against the pound and the US dollar. EURUSD gave little reaction after the IMF gave up on Greece. The sell-off in both Eurozone equities and sovereigns weigh on the single currency. Investors unwilling to carry the euro risk over the weekend will certainly unwind some more positions throughout the day.

As Mario Draghi warned on further deterioration in the Greek banking system, the ECB prepares to raise haircuts on Greek collateral used in ELA if a solution is not found by next Wednesday.

Greece remains in the driving seat
By Brenda Kelly

Just when investors thought it was safe to get back in the water, the IMF clearly tired of talking the talk; gave up and decided to walk the walk. All the way back to Washington DC.

Still no closer to an agreement, it once again seems that a Greek default is practically inevitable at this point. Given this new development and reports from Bild overnight, its surprising equity markets are holding up so well this morning. The next 24-72 hours will be crucial as we enter potentially unchartered territory for the Eurozone.

For the time being, European indices are in negative territory and in wait-and-see mode. No news is not necessarily good news but Greek officials hope to conclude a deal with its creditors at a meeting of the Eurozone finance ministers on June 18. It’s a cliché but hope has never and will never be a strategy to cling to.

A lack of European macro drivers today sees all FTSE sectors in the red with a few corporate highlights keeping a mere 14 stocks in positive territory:

Rio Tinto (+0.53%)
The mining giant is said to be assessing $300m non-cash impairment charge related to its shareholding in Energy Resources of Australia. The poor uranium market and studies that concluded an overly stretched operation timeline has been blamed for the expansion cancellation on behalf of Energy Resources. Shares in Rio have had a choppy year so far. Attempts to break form the downward trend in play since late 2011 have failed and the stock is trading fairly flat ytd. A break above the 3200p mark would be needed if this trend is to be reversed.

BT (+0.41%)
Ofcom has proposed controls on the wholesale prices the company charges for products using leased telecom lines. Expected to lead to price reductions for the consumer, the rules will take effect form April next year. Shares in BT have been trading sideways in a 30p range since February. With buying interest seen at the 440p the trend points to additional upside and may target 500p in the medium term.

Bwin Party (-8.57%)
Independent trustees of both Emerald Bay Limited and Stinson Ridge have chosen to place up to 50m shares in online gambling company Bwin.Party. The company have stated that this should provide some clarity to the market . The company has seen its business blighted by weak trading and while first quarter earnings may have offered a ray of hope, investors still await news on the approach from 888 Holdings.

Ted Baker (1.6%)
The retailer has reported a 24.2% increase in group revenue for the 18-week period from Feb. 1 to June 6. Shares in the company have had a pretty good year to date, up 31% and may well present a challenge on the all-time highs at 3000p. Online sales rose a fairly hefty 46.9% while wholesale sales were buoyed by a decent performance in the UK and North America. Full year results now look promising.

Glencore (-%)
The month long lockout at the fourth-largest aluminium smelter in the US ended yesterday. Unionized workers voted to ratify a new five year deal with Century Aluminium.

Moves in global bond yields would imply (amongst other things) that the threat of deflation has receded and the better than expected US retail sales number yesterday has also helped negate a lot of the gloomy first quarter macro metrics. US Producer Prices may well support this later today. Final demand prices are expected to have jumped 0.4%, having fallen 0.4% in April. Excluding food and energy, producer prices are seen to have increased by 0.1% in May.

Dow futures point to an 18,000 opening level – this area has represented something of a line in the sand recently and it’ll likely be Greece that determines whether or not it can gold steady.