Chinese HSBC manufacturing PMI improved slightly in June

Market Movers

• Focus to stay on Greece following positive news yesterday (see more below). The ‘Institutions’ are expected to work hard towards a final agreement during the coming days, hence the news flow is likely to continue while we are waiting for another Eurogroup finance minister meeting on Wednesday and the EU leaders summit Thursday-Friday. The aim is for the Eurogroup to reach a deal, which can be signed by the leaders at the EU summit.

• Euro-area manufacturing PMI is expected to decline as suggested by the ZEW expectations. Although it has a reputation as only describing the stock market, it has been good at signalling a change in the trend in both Ifo expectations and manufacturing PMI. The German manufacturing PMI should show a modest decline as recent hard data have been good. The current trend in euro-area service PMI is lower, which likely stems from the headwind to consumers from the higher oil price.

• US durable goods orders for May are due for release. The core measure, nondefence capital goods orders ex aircraft, has been depressed since mid-last year, which is surprising since businesses have added to payrolls. As the recovery progresses, we expect business fixed investments to pick up pace and the durable goods orders report will give an indication of whether this was the case in May.

Selected Market News

No deal was reached at the emergency EU summit on Greece last night. However, in line with most comments yesterday, the stance was more positive in terms of the prospect of a deal later this week. According to the EU leaders the latest Greek reform proposal showed that the government is finally getting serious about reaching a deal.

The Greek banking system remains under severe pressure with depositors continuing to withdraw cash. The ECB is set to discuss raising the emergency liquidity assistance (ELA) again today after it was raised on Monday and Friday last week. The issue is usually considered on a weekly basis but to keep a high pressure on Greece and due to the high risk of a bank run the ECB now considers the ELA more frequently.

The positive news flow during yesterday resulted in a ‘risk on’ market movement where periphery spreads tightened and European equities rose. However, we see a risk of some reversal of the market movement, as the ‘Institutions’ still need to consider whether the latest proposal from Greece is ‘broad and comprehensive’ enough, while Germany could add final pressure aimed at getting more Greek concessions last minute.

We continue to believe Greece and the creditors will reach a deal later this week. Too much is at stake for each side to not reach an agreement and the gap between the two sides has narrowed with the latest proposal from Greece.

Chinese HSBC manufacturing PMI improved slightly in June. The increase was the second in a row and in line with some of the recent hard data it suggests China is stabilising. This is in line with our view of a moderate recovery in H2.