Greece accepts austerity measures, doubts about China’s 7% growth rate,UK and US interest rate rises on the cards
Economic Wrap
Greece
Last week, the Greek parliament finally approved initial austerity measures as a precondition of a three year bailout package expected to be worth up to EUR86 billion. As a result, the European Council approved a EUR7 billion bridging loan that allows Greece to repay the ECB and the IMF today.
Greek Prime Minister Alexis Tsiparis’ begrudging acceptance of creditors’ terms has sown discontent amongst his incumbent Syriza government, prompting Tsiparis to reshuffle his cabinet.
In addition, Greek banks opened for the first time in three weeks, under the condtion that the previous daily withdrawal limit of EUR60 be replaced with a cumulative weekly limit of EUR420. The IMF has indicated that the introduction of capital controls in Greece was, “extracting a heavy toll on the banking system and the economy, leading to a further significant deterioration in debt sustainability”.
The IMF’s Greek Debt Sustainability report was leaked last week, revealing that the IMF anticipates the country’s debt will peak at 200% of GDP within the next two years. It estimates the debt ratio will remain as high as 170% in 2022. The report also indicated that the IMF believes Greece’s debt may be unsustainable for decades to come, and unless convinced otherwise, it will not partake in a new Greek bailout.
David Lipton, the IMF’s second in command, has also indicated that, “the important thing is [that] Greece’s debt service payments don’t cripple the economy. We are open to the idea that the problem can be handled [by] stretching out the maturities, providing longer grace periods and low interest rates”. There has been a consensus that the IMF will contribute roughly EUR16.4 billion, or 25% of Greece’s new bailout package.
China
China released its GDP figures last week, with markets doubting the Chinese Bureau of Statistics’ 7% GDP growth figure. Fuelling this scepticism are a number of factors including:
- Plummeting global commodity prices
- Slackening Chinese electricity consumption
- Slowing car sales
- Lower Singaporean quarterly growth – pointing towards recessionary levels
While China’s recent economic successes have allowed the nation to join and eventually surpass its “miracle economy” neighbours such as Japan, the Chinese Government’s continued interventionist economic policy is widely perceived as having a detrimental effect on China’s future.
The Bank of England and the Federal Reserve
Bank of England Governor Mark Carney hinted that interest rates may increase in the UK sooner than anticipated in his speech last Tuesday. In his testimony to the Treasury Select Committee, Carney said: “the point at which interest rates may begin to rise is moving closer given the performance of the economy”. Immediately following this, Sterling increased from US$1.557 to US$1.563 and the yields on UK debt rose.
Carney’s views echo those of Federal Reserve Chairwoman, Janet Yellen, who indicated her expectations last Friday that, “it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalising monetary policy”. She added that, “the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step”.
Australian dollar
The AUD reached its peak of US74.55 cents last Wednesday following the release of weaker than expected US retail sales for June, before finishing the week at US73.87 cents. With China’s perceived growth slowing, five year government bond yields fell to 2.20% on Thursday, where they currently sit. Since Wednesday, 10 year yields have been steadily declining, currently sitting at 2.92%, from a peak of 3.03% lastTuesday.
Flows
Short term volatility in yields has spiked, where we have in some cases been seeing intraday swings of about 15 basis points. Stemming from this, the ‘flight to quality’ theme has continued with clients reassessing risk in their portfolios.
We have seen interest in high quality inflation linked bonds and annuities, with particular preference for the Sydney Airport 2030 ILB and Novacare 2033 IAB. In high yield FIIG originated deals we are seeing higher trade volumes in smaller size, as investors diversify their high yield exposure across a wider range of names.
With commodity markets and outlooks increasingly weak, related credits, such as FMG, have sold off. This has carried the theme of diversification across into non-AUD denominated bonds, with buying of GBP denominated bonds picking up as clients look to spread risk into other currencies, sectors and credits.