Eurogroup meeting: Will Greece present a credible proposal?

Market Movers

• Greece remains the main focus. Eurogroup finance ministers are scheduled to meet at 13:00 CET to prepare for the euro-area leaders’ summit scheduled to start at 18:00 CET. Key focus at this meeting is whether Greece is able to present a new credible programme and to what degree restructuring of Greek debt can be included in the negotiations.

• At midnight another deadline for the Iran nuclear talks expires. Although the differences between the US and Iran appear to have narrowed, another extension of the deadline cannot be ruled out.

• Today’s data calendar is relatively light. The most interesting release is industrial production in Germany and the UK. Norway and Denmark will also release industrial production.

Selected Market News

• ECB yesterday decided to keep the cap for Emergency Liquidity Assistance (ELA) for Greek banks at its current level (EUR89bn) but increased the haircuts used on collateral used by Greek banks. Greek banks are still believed to have sufficient collateral, so the ECB decision is not expected to force Greek banks to cut their lending from ECB immediately. The Greek Bank Association announced that banks will remain closed at least until Thursday.

• The main message from the meeting between Chancellor Merkel and French President Hollande yesterday was that it is now up to Greece to deliver a credible proposal for a new programme. However, there is disagreement between Germany and France with France much more open to including Greek debt restructuring in the negotiations.

• In an interview yesterday ECB governing council member Nowotny said that funds would be cut off if Greece misses its payment to the ECB on 20 July. Nowotny also said that if an agreement is reached the ECB could provide a temporary bridge loan to Greece until permanent financing is in place.

Markets Today

• In the financial markets the impact from the Greek ‘No’ continues to be modest. The US stock market closed slightly lower yesterday with S&P 500 finishing down 0.4% but US stock futures moved higher in Asian trade. Asian stock markets are mixed this morning with Nikkei up 1.4% but Shanghai down 3.2%. The Chinese government’s measures to stabilise the stock market do not appear to be working.

• In the fixed income market US bond yields are largely unchanged since markets closed in Europe yesterday. No big movements in the FX market overnight either. EUR/USD has declined slightly to 1.1030. No substantial impact on the AUD after RBA as expected left its leading interest rate unchanged.