TOP STORY 1: THE GREEK DRAMA – our Chief Strategist’s view

Julius Baer - Martes, 07 de Julio

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Investors get used to surprises from Greece; yet the latest vote raises the odds of a more protracted debt resolution. Chinese boom/bust adds to subdued sentiment, globally.- Yet, financial stocks continue to trigger technical buy signals such as Credit Suisse, while the commodity bear rages in both oil and gold. GDF Suez is for yield hunters.

European investors got grilled by both a record heatwave and Greek jitters in early summer. While the former is forecasted to taper off, the Greek resolution does not look like the promised 48-hour deal. Hence, the whole of the London ‘City’ is crying ‘Grexit!’ instead. The Anglo-Saxon world has never liked the European single-currency idea and would not mind seeing it dissolve rather sooner than later. Yet, while the odds of a disorderly Greek exit may have risen, European political leaders’ creativity, patience and stamina should not be underestimated. That said, the latest turn in the Greek saga may indeed trigger another escalation before a deal can be struck. So the heat and noise may persist before the Europe-an Central Bank’s money becomes due on 20 July.

 

Contrary to mainstream investor sentiment, our fixed income strategists have warmed up to European peripheral debt outside Greece as there is a lot of firepower from the central bank and institutional reforms are likely. This assessment is backed by the behaviour of financial stocks and commodity markets. Financials have been posting technical buy signals in the past weeks. The latest name here is Credit Suisse, our technical analysts’ preferred choice this week. And in the commodity space, gold is giving the same signal – pointing to further downside in this safe-haven asset and signalling lower odds of disarray in financial markets.

 

At the same time the helter-skelter in Chinese stocks is echoing the fears from Europe in one of the hottest investment topics of the past six months. While the attempts to stabilise the market will take some time, we are confident that it will be achieved. The ‘screaming buy’ territory is approaching. Finally, we have downgraded our preference for dividend yield strategies – nevertheless, we are highlighting GDF Suez as the stock of the week as it combines a 5% dividend yield with the prospects of annual earnings growth of 8% until 2017. Not bad in an environment of growth scarcity globally.

 

Christian Gattiker, Chief Strategist and Head Research, Julius Baer

 

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TOP STORY 2: THE GREEK DRAMA - FIXED INCOME VIEWP

ECB keeps ELA level stable but increases the haircuts imposed

Last night, the European Central Bank (ECB) maintained the emergency liquidity assistance (ELA) level available to Greek banks at EUR89bn but increased the haircut imposed on the collateral posted. The precise haircut level was not disclosed. The move increases the pressure on Greek banks and ultimately the Greek state to find a deal with creditors soon, as banks are running out of available liquidity. Obviously the Greek banks are unlikely to open any time soon - the presidential decree keeps them closed until tomorrow but will probably need to be extended.

 

After meeting with French President Hollande last night, Chancellor Merkel stated that time is running out for Greece (Sell/Speculative) to find a solution with creditors. Greece is determined to find a solution to stay in the eurozone: Prime Minister Tsipras yesterday managed to secure the support of all leaders of the political parties in parliament for any deal he would bring, realising that he could face losses from his own party. Today European finance ministers and leaders are meeting to decide on the next steps for Greece.

 

The pressure on Greece to find a solution soon is mounting and all eyes are now shifting to 20 July when a EUR3.5bn bond held by central banks matures. If Greece does not redeem the bond (which is likely as the state has run out of cash), besides triggering cross-default clauses with Greece’s other debt, this should provide an easy argument for the ECB to pull off the ELA, leading Greece to issue IOUs (I-Owe-You) as a parallel currency to cover wages and pensions and thus raising the risk of withdrawal from the euro area.

Eirini Tsekeridou, Fixed Income Analyst, Julius Baer

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ECONOMICS: An overview of the economic cycle

•       Of the four pillars of global growth, China shows a further slow-down, while the US is bottoming out. The eurozone’s recovery is broadening, while growth is gradually picking up in Japan.

•       After the US mid-cyclical correction in Q1 2015, the current recovery in consumer activity underpins an overall moderate growth upturn expected in the second half 2015.

•       The eurozone will continue to gain traction and is likely to achieve pre-crisis growth rates until 2016, regional divergences, however, remain large. The Greece crisis is a downside risk for the euro, but no contagion risk the eurozone’s cyclical recovery.

•       As long as the franc remains below the ‘recession threshold’ of EUR/CHF 1.05, Switzerland’s unavoidable technical recession in H1 2015 might last longer, with only a modest in late 2015.

•       Most emerging markets in Latin America, Africa and the Middle East remain sluggish and are a source of global demand weak-ness. However, East Asia, around the heavyweights China and India, remains a significant source of demand growth.

•       Low commodity prices have only temporary deflationary effects. Until price stability is assured, monetary policies will re-main expansive over the medium term.

•       Some central banks maintain a focus on containing deflation, e.g. by weakening their currency. However, we still expect first rate hikes by the US in Q4 2015 and UK in Q1 2016

 

 

 

David A. Meier, Economist, Julius Baer

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ECONOMICS: China: Reforms versus growth

Reforms and deleveraging in the Chinese financial sector have led to a slowdown in economic growth over the past year, also affecting the property sector. Fiscal and monetary policies eased somewhat to stabilise economic conditions, but more is likely to follow in order to bring economic growth up towards the 7% growth goal this year. Structural reform momentum remains high, particularly in the areas of financial liberalisation, financial regulation, consolidation of state-owned enterprises and bringing local government debt under control. Chinese economic growth will slow further in 2015 as it will take considerable time until reforms are implemented and start to result in positive effects.

Susan Joho, Economist, Julius Baer

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COMMODITIES: Technical selling adds to oil oversupply fears

Oil prices sold off yesterday, dropping below USD 60 per barrel. We believe that oversupply fears are currently weighing on the market. United States oil inventories have been rising again while recent increases in rig count data indicate a swifter bottoming of shale drilling activity in the United States. The pick-up in activity might be illustrative for the competitiveness of the shale industry which thanks to cutting costs might have become comfortable at prices around USD60 per barrel. Outside the United States, nuclear talks with Iran were extended once again and solution remains on the cards. Although oil is unlikely to flow at substantial volumes before 2016, Iran remains a long-term bearish factor for the market.

 

Data on the demand side data out of China, such as crude oil imports, has been weak lately and has contributed to oversupply fears. Taken together with falling metal prices, commodity markets are signalling broad-based concerns about Chinese demand and the government’s ability to stimulate growth. Furthermore, we see technical selling adding to yester-day’s sell-off in the oil market but still expect prices to move towards the upper end of the past months’ USD 60 to USD 70 per barrel range as strong demand and declining shale oil production are set to tighten the market. We reiterate our positions in oil producers, pipeline operators and volatility carry strategies.

Oversupply concerns and technical selling burden oil prices. The pick-up in US shale drilling activity might be indicative of the industry’s competitiveness at prices around USD60 per barrel. We maintain our neutral view with near-term price risks skewed to the upside as markets tighten faster than anticipated.

Carsten Menke, Commodities Research Analyst, Julius Baer

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