Equities continue to trade higher on Greece deal hopes

This morning’s market action

European equities continued to trade higher this morning, bulls still running with the expectation that a deal between Greece and its creditors is imminent following the promising talks over the past couple of days. Indeed, yesterday might come to be known as the day Tsipras kept Greece in the monetary union, finally offering concessions over pensions and VAT, previously known to represent no-go ‘lines in the sand’ for the embattled Greek leader. One suspects that it was the conversation yesterday with the ECB’s Draghi which finally persuaded him to offer some serious reforms; Draghi allegedly informed him that the ECB would only provide liquidity support for the Greek banking system if the country remained in an aid program. With deposit outflows increasing in recent days, the Greek banks are known to be in a very perilous position, and if the ECB withdrew its liquidity assistance they would be almost certainly rendered insolvent. This proved to be the creditors’ trump card, as concessions followed and Tsipras remarked at the end of another day of intense negotiations that ‘the ball is in the court of the Europeans’. Markets rallied sharply with the Dax leading the charge in posting its biggest single-day gain in three years. Fixed income sold off in a traditional risk-on move, with the US 10yr now trading comfortably below the pre-FOMC low. The bund retraced some of yesterday’s losses following news that German net issuance for this year would be lower than originally forecast.

Today’s View

So where does this leave us for this afternoon’s session? Thankfully, this afternoon’s calendar provides some distraction from the Greek situation, with US Durable goods orders at 13:30 BST followed by US New Home Sales and the US Manufacturing PMI. The dollar has strengthened in recent days, with the positive news regarding Greece perhaps forcing investors to look beyond to the next big risk: potential Fed rate hikes. For now though, Greece is still the likely driver of sentiment and it is difficult to look beyond a continuation of the bullish tone in equities as investorstransition from hope to expectation that a deal will be agreed. However, do not rule out a ‘sting in the tail’; if anything has taught us about the numerous Greek standoffs in recent years it is that a deal isn’t done until, well, it’s done. Do not forget that, although we appear to be nearing a top-level agreement with Tsipras and the creditors, this still has to be passed by the Greek parliament, and this is by no means a foregone conclusion. The extreme left-wing members of the Syriza party will be smarting at Tsipras’ breaking his supposed ‘line in the sand’, many of whom will feel cheated by the man who they elected to talk tough with the creditors, protect the pensioners and secure debt relief. He has done neither and so the bullishness in equities is likely to be tempered until/unless the deal goes through the Greek parliament. Therefore, we are looking for longs from conservative levels in the S&P, further downside in t notes and crude, but looking for a bounce in the euro after the strong sell-off this morning.