Greek drama not over yet

Outlook:

Tsipras is admitting defeat and has accepted the eurogroup proposal, albeit with conditions that can drag things out for another week or more. The wily Juncker, with Draghi’s help, probably deserves the credit. Reuters reports when asked “by report-ers to comment on Athens' latest proposal, Juncker smiled enigmatically and said: ‘I am in permanent contact with Greek and other authorities.’"

A few things: the equity markets interpreted the Tsipras letter as capitulation, even if the drama is not over yet. And there is many a slip between cup and lip, including the possibility that the eurogroup will not, as Merkel said, do anything final until after the referendum. And if the referendum results in a “no” vote? Nobody knows. In fact, Tspiras may be able to stay in office and not have to resign if the vote is “yes,” considering he is still active in talks. Tsipras is laboring hard to make the referendum not a vote of confidence in his leadership. In this sense, Juncker threw him a lifeline.

We say suggestions that the referendum can be called off are a misjudgment. The eurogroup has won, so to speak, and will not miss the opportunity to drive home the point that the Greek voters prefer to stay in the eurozone. Let’s not forget that Schaeuble suggested a referendum a long time ago as a put-up-or-shut-ip to the annoying Varoufakis. Insisting on the referendum is eurogroup (Juncker) interference in the domestic political affairs of a member country, and yet you can hardly say the eurogroup doesn’t have a dog in that fight. The referendum is notionally about the budget plan, but Juncker re-positioned it as about eurozone membership. The Greek voters would have gotten it, anyway.

If the Greek capitulation works out, there are a number of consequences, including a possible return of interest in commodities, says the Market News reporter, neglected of late. We can also start fretting about China again. And let’s not forget Puerto Rico’s default, which would be the top headline if Greece had not gotten there first. Puerto Rico has both interest and principal repayments due today, with one report saying they are as much as $2 billion, with $400 million on the Electric Service bonds alone. That may be one thing but default on Commonwealth paper would be a stunner. The US has no experience restructuring general obligation bonds of a state. Remember how awful the Detroit experience was. Puerto Rico is not a state but faces the same refusal to bail out from the Feds—doesn’t it? It seems that nobody knows.

And today brings a slew of releases ahead of tomorrow’s early payrolls. We get the ADP private sector forecast, weekly jobless claims, construction spending, auto sales, the ISM, and Markit manufacturing index.

We like the summary by St. Louis Fed Bullard yesterday: Greek economic problems will not likely af-fect the US economy, so the Fed is still on track to hike rates in September, which is still “very much in play.” In fact, very low interest rates can create financial system problems and the Fed could need to raise rates more than normal to offset those risks. What Bullard means is that low rates “feed the bubble process.” While not naming the US stock market as having bubbled, it’s something to watch.

We welcome Bullard’s remarks. The Fed has always maintained that nobody can define a bubble or de-cide what actions to take against bubbles. Now we have the “bubble process,” vague but the recognition still satisfying. Taming bubbles is a key goal of normalization, whether you can define “bubble” or not. And while Bullard didn’t say it out loud, the market is already plenty worried about a bubble. The Dow closed the quarter down 0.9% and the S&P, down 0.2%. Weirdly and counter-intuitively, getting the rate hike under our belts could easily remove the bubble uncertainty.

If Greece is now mostly behind us and assuming US data is good today and tomorrow, we can turn attention to rising US yields. We probably need to assume rising Bund yields, too, but Bund yields have a cap in the form of ECB QE buying while in the US, the sky’s the limit. The fixed income crowd has yet to say firmly that 2.50%+ is definitely in the cards, let alone 3% or more. The experts cut back their yield forecasts after Q1 GDP was a negative and we are not seeing the usual sky-is-falling rate hike talk—yet.

The closest we can get to that is Bill Gross’ observation that a liquidity crisis is all too likely given the world has never had to normalize before. Investors have not had to deal with falling prices/rising yields at a time when the buyer of last resort, the Fed, is sitting in a chair with hands tied. We say Gross is ex-aggerating—the Fed can step in any time it sees the need for intervention, end of QE notwithstanding—but the process of yields rising may be a super-slow one, assuming the Fed has the same fears. NY Fed Pres Dudley certainly has it.

All the same, rising yields supposedly favor the dollar, at least most of the time, in the absence of coun-tervailing factors. That means our “buy €” signal is dead wrong. The dollar may not rally as much as we would like or at a strong pace, but the euro failing to rise on the Greek “solution” today means we are back, probably, to conventional analytical factors.

Notice to Readers: Friday, July 3 is a national holiday in the US. Markets are closed. There will be no reports.