Market hike ahead despite Greece’s uncertainty
Let us prepare for what is likely to be the biggest climb down in recent financial history and a positive market reaction, says Rowan Dartington Signature’s Guy Stephens
The markets still appear to be relatively relaxed as the tension builds in Greece which, to some, may appear odd given the doomsday scenarios reflected in the media.
There has been around a 5% retracement in the equity market from the highs seen in April and the bond markets have weakened a little but nothing of any significant order. The influence there has been more related to the comments from the Federal Reserve following their last interest rate setting meeting.
So why is this? Well, it is actually quite simple and it is often the case that the proclamations of the media are out of kilter with the pricing of the market, and this provides opportunity. As I write this article, the FTSE-100 is up over 1%, despite the emergency talks in Brussels appearing to suggest no deal is likely.
The key to this is that none of this is coming as a surprise and there are three possible outcomes, one of which is quite unthinkable and the other two involve muddling through.
The first, and most likely, is that a deal of some sort is agreed at the eleventh hour as this has historically been the way deals are eventually done in Brussels.
The talking fills all the available time until eventually the time is up and personal credibility comes into play, hence the comments from Christine Lagarde last week about having adults in the room.
The red lines on taxes, VAT and pensions are known and so phasing the next bail-out tranche along with repayments creates a circular arrangement whereby the troika effectively pays itself.
All it requires is some flexibility over the payment schedule. As Greece doesn’t have the money to repay the loans, the bail-out tranche of €7.2bn is the only way to avoid a significantly greater debt write-down when they default – and that has to be a preferable message to deliver to, ultimately, German taxpayers.