Greek uncertainty undermined European equities again this week, as the FTSE 100 and the Euro first 300 both fell around 1%. In contrast the S&P 500 managed a small gain. The US Federal Reserve and Greece dominates capital market sentiment week after week. Despite the ongoing concerns the euro gained ground against the US dollar in the past 5 days, but this may have been as much about the continued weakness in the US dollar as an improving sentiment to the euro. In contrast the euro did lose ground against sterling, but not by a material amount. The concerns of what the Greek fall out may be, as yet does not appear to be having a major impact on the currency itself.
Yields on Greek bonds continued to rise, the 2-year Greek government bond yield climbed on Friday to 28%. This remains materially below the 300% 2 year yields rose to ahead of the last Greek debt restructuring agreement in 2012. Peripheral bond prices have fallen in past few weeks, however they recovered some of those losses in the past week. US Treasury yields continued to retreat post the Federal Reserve’s briefing on Wednesday evening. 10 year gilt yields remain pegged around 2%.
The weekly fund flow data saw the largest outflows from bonds in 2 years (over $10bn) and in contrast over $10bn went into equity funds. This was the 4 largest bond-equity rotation in the past 6 years. In Merrill Lynch’s opinion risk in their words has been reset “ big time” as global equity market breadth most oversold since the start of the year. Market breadth is a tool used by technical analysts to measure market sentiment by analyzing the number of company prices moving higher relative to those moving lower. The weekly AAII investor sentiment survey reported a small increase in bullish sentiment, however 75% of those polled still believe the equity market will be unchanged or lower in 6 months time.
Economic data in the US will be in even more focus in the coming weeks as economists decide whether September is now the date for the first rise in US interest rates. This week the focus will be on Tuesday as we get the latest durable goods orders data for May. On Friday we get the Michigan Consumer Sentiment for June.
China may once again come into focus on Tuesday as we get the latest HSBC manufacturing purchasing managers index for June. Expectations are for the index reading to remain marginally below 50, the level that is considered the mark between an expanding and contracting manufacturing base.
As for Europe the ongoing negotiations over Greece will dominate market sentiment. On Sunday the FT reported that Greece must come to an agreement on economic reform measures before the crucial summit on Monday between Athens and its creditors.