A quick review of the issues and events driving the markets this past week... and what's on tap for the week ahead.

Weekly Market Snapshot

July 6, 2015

"A popular verdict is much stronger than the will of a government."

— Greek Prime Minister Alexis Tsipras, on the July 5 referendum about whether to accept the terms of Greece's creditors (Tsipras' Twitter account, July 1, 2015)

The week in review...

GREECE

Referendum: Turning up the tension Greece's call for a July 5 referendum on the creditors' most recent offer did little to end the crisis; the creditors called off negotiations until after the vote is tallied. Greece failed to make its June 30 payment to the IMF, placing the country "in arrears" but not yet technically in default. Tsipras then attempted to restart the talks by accepting most of the recent offer, subject to changes yet unspecified. When that failed, Tsipras began to campaign for a "No" vote on the referendum, opposing most of the terms he had just offered to meet. Sovereign yields for Portugal, Italy and Spain rose only slightly, but the yield for Greek 10-year sovereigns shot up to 14.66%,¹ a level not seen since the latter part of 2012.

UNITED STATES

Jobs: Attention shoppers With hiring still generally on the upswing, it's little wonder that shoppers are stirring – to the benefit of the slow-growth US economy. The unemployment rate for June fell slightly, to 5.3%, even as the labor participation rate softened and average hourly earnings stayed flat month-on-month. But June consumer confidence rose more than expected, according to the Conference Board's survey. The housing market also reflected growing demand; prices for the top 20 markets rose over 4.9% year-on-year in April.

Puerto Rico: Out in the open PREPA, the island's government-owned electric utility, made an on-time $415 mn payment on its municipal bonds, to the relief of the insurance agencies covering the bonds. But Puerto Rico's debt challenges continue. On June 29, Governor Alejandro García Padilla raised eyebrows among owners of its $72 bn in bonds by announcing the widely-known (but largely unspoken) act of its debtors' inability to fully pay their obligations. Calling for creditors to "share the sacrifice", owners of the wide variety of municipal bond types may have to negotiate against each other soon. The challenge: since US law doesn't currently permit Puerto Rico to declare itself bankrupt, those negotiations could be more complex than in standard bankruptcy proceedings.

ASIA

China banks: Easing away from the bear By lowering its bank reserve requirement ratio (RRR) for finance companies by 300 basis points (bps) and its benchmark interest rates for one year lending and deposits by 25 bps – to 4.85% and 2% respectively – the central bank may have hoped to halt the dramatic fall of China's equity market as well as accelerate the overall economy. But the moves appear to have had little effect; the Shanghai Composite Index is down over 22%² since its high on June 12, putting the index squarely in bear-market territory.

Japan: Young workers resume spending Consumers in their twenties are reverting to habits of better times, saving less and consuming more, according to government and private-sector survey. The consumption increases include alcohol, clothing, motorbikes and cars – no surprise given the ages involved. The pattern bodes well for both present and future economic growth, and could be cause for cheer by the current government, desperate to kick-start both consumption- and manufacturing-driven growth.

¹ As of July 1 2015, 11:00 PM ET
² As of July 1 2015, 11:55 PM ET

Signs of the times:

Japan business mood improves, capex plans at decade high: BOJ Tankan – Reuters

Value of household assets inflates to ¥1.708 quadrillion thanks to BOJ strategy – Japan News

Oil Stocks Hit Two-Year High in Europe Hub – Wall Street Journal

Second-quarter M&A close to record amid mega deals - Developments – Reuters

Lowest-Paid Americans Lead Wage Gains as Job Market Tightens – Bloomberg

Sources: Bloomberg, Wall Street Journal, Financial Times, New York Times, Xinhua, Mainichi News, Japan Today, Kathimerini, Twitter.


Definitions:

The International Monetary Fund (IMF) is an international organization of member countries, established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements.

The ADP National Employment Report provides a monthly snapshot of U.S. nonfarm private sector employment.

Capital expenditures (capex), also called capital spending, is an amount spent by a company to acquire or upgrade productive assets (such as buildings, machinery and equipment, vehicles) in order to increase the capacity or efficiency of a company for more than one accounting period.

A basis point is one one-hundredth (1/100, or 0.01) of one percent.

The Conference Board is a US-based business membership and research association.

The Shanghai Stock Exchange Composite Index is a capitalization-weighted index. The index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange.

By convention, a market is considered to have become a bear market after it has declined 20% or more.

Mergers and acquisitions (M&A) is a general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed.


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Poll

When will the Fed raise the Fed Funds target rate?








Poll

When will the Fed raise the Fed Funds target rate?

June
(2%)
September
(33%)
November
(23%)
Not until 2016
(42%)



Previous month Poll

Will the current wave of central bank easing jump-start the world's economies?

No - The real issues are structural - real progress on labor reform and regulatory excess will have more impact
(32%)
No - Deflation is already taking hold, making monetary policy changes ineffective
(5%)
Yes - The US model shows that monetary easing can help economies heal in the medium term
(19%)
Yes, but it will take even  longer than it did in the US, and the delay will have a negative political impact
(44%)