Weekly Market Review 13-19/07/2015

Draghi and the Greek Crisis

Yet again, the Greek debt debacle will dominate the headlines for this week but with a twist. At the heart of that twist is the ECB’s rate decision and Mario Draghi’s press conference which follows. There are several key issues for Super Mario and the ECB’s governing council which will need to be addressed if there’s any hope that investor confidence can be restored. The situation, in a nutshell, is this. Little more than a week ago, the Greek referendum on accepting the terms of a new bailout plan was a no go. This past week, Greece’s lenders gave the government a little more time to come up with a new plan of reforms. The lenders want those reforms agreed to and in place before they agree to provide any additional funding.

And speaking of funding, that is a major problem; liquidity in Greek banks is thinning out exponentially. Nervous Greeks have been attempting to withdraw their cash holdings from already depleted reserves. How the ECB will deal with that growing problem is a major consideration. Under the Emergency Liquidity Assistance program (ELA) the ECB has been injecting liquidity into Greece’s banks. The Greek government recently requested that the ECB raise the ceiling in order to keep Greece’s banks afloat. The council must consider the extent to which it is able to help, especially given a possible Greek default.

That brings us to the next issue. The ECB holds a significant amount of Greek sovereign debt on its balance sheet. Thus the ECB must come up with a plan on what it will do with that debt which would be rendered worthless in the event of a default. On July 20th, the Greek government has a bond payment of €3.5 billion coming due to the ECB. There is currently no money in the Greek central bank coffers, so the question is where will that payment come from? If the ECB does not get its payment, it puts Mario Draghi and the ECB in a difficult position. In that event, the governing council could make the decision not to accept Greek’s sovereign debt as collateral any longer.

And last, but certainly not least, we will learn how Mario Draghi views a possible Greek exit on the Eurozone’s overall outlook, and how the Euro might be impacted. There are three possible options that Super Mario might take. First, he could express his concern about the situation and state that the ECB is ready to deploy additional emergency measures. That would be positive for European indices (i.e. DAX, CAC, STOXX, etc.) while weighing on the Euro. Second, Draghi could express the ECB’s concerns over the situation but fail to offer any sort of relief or special measures. That would be bearish for European indices as well as the Euro. Third, he could say that the ECB is not concerned about the situation. That would be mildly positive for European indices and provide a lift to the Euro.

Janet Yellen Testifies

The next key event for the week also occurs on Thursday, shortly after the ECB decision. Janet Yellen, the Chairman of the Federal Reserve Bank, will begin testimony before the US Congress. Markets tend to view the Fed Chair’s testimony as a “mini” policy decision in that it provides some insight. Financial markets are still trying to gauge the timing of the next interest rate hike from the Fed. What they’ll look for from the Chairman’s testimony is her “attitude.” If she is upbeat and hints at a rate hike in the nearer future, that would be dollar positive yet weigh on Wall Street equities. If, on the other hand, she takes a more cautious stance, Wall Street could heave a sigh of relief even as the dollar feels the pressure.

Down to Business

With the fallout from the Greek crisis looming and the far reaching effects the ECB’s decision will have on the Greek crisis , it is clear Super Mario Draghi and the ECB press conference will be the main show. If Draghi deploys emergency measures and be more patient with Greece and its debt to the ECB , it may send a sigh of relief to markets and support European indices will weaken the Euro. When it comes to Yellen , clearly, any hint of an upcoming rate hike will weigh on the EURUSD . This will daunting effect on the Euro will be especially bearish for the EURUSD if it comes after a dovish announcement from the ECB earlier in the day, which will only amplify the contrast the two central banks.

On the plate

US Retail Sales(Tuesday)- If US retail sales gains more than 1.2% Month on Month it will be considered an upbeat sign for both the dollar and Wall Street.

BoJ Monetary Policy(Wednesday)- If the BoJ backs away from its previous hawkish statement that there is no need for more easing , the Yen could weaken.

UK Inflation Hearings(Wednesday) – The discussion in the UK’s parliament on the prospects for inflation could support the Sterling if inflationary outlook turns upbeat.

ECB Rate Decision(Thursday)-  If the ECB is ready to deploy liquidity it will calm equity investors and could weaken the Euro further.

Fed’s Yellen Testifies(Thursday)- If Yellen hints rates will rise sooner rather than later the dollar stands to gain.

US CPI(Friday)- IF US core CPI(excluding food and energy) nudges closer to 2% it will be a cue that rate hikes in the US are getting even closer.

Chart of the week – Oil

oil chart weekly

Economic Calendar:

Real Time Economic Calendar provided by Investing.com.