UPDATE 1-Greek drama not likely to waylay Federal Reserve

30 Jun 2015 | Author: | No comments yet »

Get Ready For the Biggest Stress-Test of Them All.

The economic engine is purring in the U.S. but the wheels are falling off in Greece – and that might be enough to convince the Federal Reserve to delay raising interest rates beyond their September meeting.Selling was only done if there was a change in strategy of the business, conditions in the industry had changed, or there were management issues, profits were falling or in danger of falling.

In fact, Greece is just one of a handful of global financial turmoils that could prompt reluctance on the part of the U.S. central bank to start raising borrowing costs for consumers and governments for the first time in nearly a decade. “China, Greece and Puerto Rico all are issues for the Fed. For him, a savage sell-off with all the headlines about billions being wiped off the value of the sharemarket was an opportunity to add to his existing holdings at a better price, or become a shareholder in a company that he’d had his eye on for a while but hadn’t taken the plunge because the price wasn’t right. Photo: Bloomberg First, Greece now seems to be on a slippery slope leading to an exit from the euro and, second, the Chinese central bank cut its policy rates after a crash in the markets.

They reflect a global economy which is not correcting the imbalance between supply and demand,” said Steven Ricchiuto, chief economist at Mizuho Securities. “These problems tend not to surface when the global economy is accelerating, when inflation is rising and wages accelerating,” he added. “So they are reflective of the macro environment that suggest the Fed should not hike rates in September.” U.S. stock markets plunged Monday with the Dow Jones Industrial average down 200 points at 11 a.m. It’s important to note that on the days when shares are up and creating headlines for “good” reasons, think “best day in six months”, or “highest level this year”, he would have the same discipline but could just be easily selling stocks as they got more expensive. Investors all along figured despite the brinkmanship between the Athens government and its eurozone creditors, that an eleventh-hour deal would get done this past weekend and that bailout funds would keep flowing to Greece. That severely adverse scenario was indeed pretty scary: oil back to $110 per barrel; unemployment soaring back to 10 percent and staying there well into 2016; a 4.5 percent contraction in GDP growth; home prices down 25 percent, equity market down 60 percent; sharp recessions in the United Kingdom and Japan; sluggish growth elsewhere in the world.

So it’s good news to hear that even under those circumstances, most banks have modeled their risks that they can emerge battered, yes, but unbailed out. Whether those bets are correct will depend on how turmoil in the euro zone plays into Fed officials’ forecasts for growth, employment and interest-rate increases this year.

The government shut down banks over the weekend to prevent more panic-stricken withdrawals and it seemed almost certain Greece would default on a 1.8 billion euro payment due Tuesday to the International Monetary Fund. In one way, that line of thinking is not a lot different from one of Warren Buffett’s most famous takes on the stock market: “To refer to a personal taste of mine, I’m going to buy hamburgers the rest of my life.

A study by the McKinsey Global Institute in February said Greece’s total debt was 317% of its gross domestic product (GDP), while China’s was 217%. That was a key goal of the Dodd-Frank Act five years ago, and corporate compliance and risk managers have been grinding away to manage these stress tests ever since. Chair Janet Yellen made it clear in her June 17 press conference that she needed to see “more decisive evidence” of sustainable economic momentum that supports labor markets and gradually firming prices.

Greece’s new far-left government has broken off negotiations with Eurozone fiscal leaders, rejecting austerity as the path forward for the debt-riddled nation. So, if global growth weakens, or remains weak, and we get into a trend of that, then yes, that will be a big headwind for the United States economy.” “It is a fact that, to the extent we are the strongest, and the dollar increases in value, then … we will grow more slowly and monetary policy will react accordingly.” “In the event that there is not agreement, I do see the potential for disruptions that could affect the European economic outlook and global financial markets. Instead, Greek Prime Minister Alexis Tsipras has called for a referendum next weekend during which Greek voters can decide whether to accept the conditions for another bailout set by European fiscal leaders. “The dramatic end of talks on Saturday along with the vote in the Greek parliament to hold a referendum next Sunday on the bailout package proposed by the IMF, the ECB and its European neighbors, suggests that the bomb of Greek default is perilously close to detonating,” said David Kelly, chief global strategist at JPMorgan Funds. That triggered a chain reaction that included the European Central Bank saying it would not increase its cash lifeline to Greek banks, forcing Greece to announce that its banks wouldn’t open Monday. The obvious example is Greece, and we should all brace for what’s to come this week out of Athens and Brussels. (My prediction: a default and exile out of the Eurozone currency.) But remember that Greece is only one of several systemic risks that the world’s financial system is facing right now.

When stocks go down and you can get more for your money, people don’t like them any more.” But there are a few other concerns on the horizon for shares. And what it’s going to require is Greece being serious about making some important reforms not only to satisfy creditors, but, more importantly, to create a platform whereby the Greek economy can start growing again and prosper. The US Federal Reserve is poised to raise interest rates, economic growth is hardly robust around the world, and the bull market in shares has been going for a quite a few years now, prompting worries it has to have a correction at some point. There could be violent swings as markets from Asia to Europe and then the U.S. react to the fluid headlines out of Europe, Axel Merk, money manager at the Merk Funds, told USA TODAY on Sunday. “Expect volatility,” he said, adding that risky assets like stocks could tumble. A ballooning trade deficit cut 1.9 percentage points from GDP in the first quarter of this year and about 1 percent in the fourth quarter of 2014, the biggest back-to-back drag since the first half of 1998.

But the contagion isn’t likely to spread outside of Greece to other European nations such as Portugal, Spain and Ireland which were also threatened recently by massive debts. Indeed, the lack of a deal also shifted Wall Street’s focus away from the jobs report and sifting economic data to determine if the economy is strong enough to force the Fed to put a September rate hike back on the table. Plenty of people will say that the banking world has already de-risked away from Greece, since the country has done its debt-addled pas de duex with European Union creditors for five years. Greece’s impact “will depend on the market reaction, especially the dollar,” said Mark Spindel, chief investment officer at Potomac River Capital, a hedge fund in Washington with $750 million under management. “We know how sensitive the Fed committee is to dollar strength.” Financial conditions: Fed stimulus works through financial markets by lowering financing costs on everything from cars to homes. But investors in China would do well to ask themselves instead why the Chinese government is so desperate to perpetuate what everyone agrees is a huge bubble.

The timing of all this international turmoil is poor for U.S. central bankers eager to ‘normalize’ U.S. monetary policy after years of unprecedented stimulus in the wake of the 2008 financial crisis. Will markets tumble, as stock market strategists fear, when they open Monday? (In Japan, the Nikkei 225 stock index was down nearly 2% in early trading and stocks in Hong Kong were off 1.3%.) Will Greece pay the money it owes the IMF by Tuesday’s deadline or default?

While the euro area has broadened its policy toolkit and most member states have made significant strides in building resilience in the past couple of years, the recovery is still fragile in several member states, and vulnerabilities to financial stresses remain.” “Based on today’s picture of moderate underlying momentum in the domestic economy and the likelihood of continued crosscurrents from abroad, the process of normalizing monetary policy is likely to be gradual.” “All that has been done so far makes it very likely that EMU — the Economic and Monetary Union — will survive this crisis. Fed officials “need to see where mortgage-backed security spreads and corporate spreads are to Treasuries” and what happens to stocks, which influence consumer confidence and spending, said Michael Gapen, chief U.S. economist at Barclays Capital Inc. “Those are your primary starting points” as a policy maker, Gapen added. And while the initial reaction on Monday could be quite negative, my hunch is the market will wait it out and see what happens” with the Greek referendum.

The central bank has cut interest rates four times in less than a year, and telegraphed the message to banks that they should keep the lending spigot open. But all of the market uncertainty prompted by the latest Greek crisis clearly has markets on edge, and the Fed will be understandably cautious about throwing more uncertainty into a fragile marketplace by raising rates in September. With all that cheap money, people and businesses have been taking on more debt to invest in that over-heated stock market rather than in growth plans. Even if you put aside the argument that large parts of America still aren’t enjoying good economic growth (an argument that still has lots of evidence, by the way) and agree that the Fed kinda sorta maybe perhaps should raise rates just a teeny-weeny bit (which is all commitment Fed governors are willing to make right now), the question remains: does anyone on Wall Street still remember how to make money when rates are rising? If the stock market really is over-valued these days thanks to low interest rates for so long, a rate hike is like a pin tapping against a balloon: the higher the rate, the stronger the tap.

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