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Market Recap – Greek Debt Crisis Drags On

Market Digest – Week Ending 5/29

Stocks retreated as US economic growth swung into negative territory. Q1 GDP shrank 0.7% in a revised estimate. The result is expected to be a bump in the road as harsh weather and a stronger dollar contributed what may be temporary factors. Still, the result was a wake-up call for some that the economy may not be as solid as generally perceived. Increased concerns around Greece also contributed to selling pressure.

Weekly Returns:

S&P 500: 2,107 (-0.9%)
FTSE All-World ex-US: (-2.3%)
US 10 Year Treasury Yield: 2.13% (-0.08%)
Gold: $1,190 (-1.2%)
USD/EUR: $1.099 (-0.2%)

Major Events:

• Tuesday – Greece said it will make its next scheduled payment to the IMF on June 5.
• Tuesday – Iraqi forces mounted a counter-attack against ISIS in response to the group seizing Ramadi last week.
• Wednesday – Avago Technologies is in advanced talks to buy Broadcom for $35 billion.
• Wednesday – The US Justice Department charged 14 current and former FIFA officials with corruption. Seven were arrested in Zurich.
• Thursday – Google unveiled its new Android Pay, which is quite similar to Apple Pay.
• Thursday – Christine Lagarde, head of the IMF, said a deal is unlikely to be reached with Greece in the next few days and said an exit from the Eurozone is a possibility.
• Friday – Q1 US GDP is revised down to -0.7%.
• Friday – Silk Road founder Ross Ulbricht was sentenced to life in prison, showing the governments seriousness on combatting internet crime.
• Friday – Health insurer Humana is considering selling the company, in a move that could trigger a wave of consolidation in the industry.

Our take:

In the three years we’ve been writing this weekly digest, no topic has been covered as often as the Greek debt crisis. So while we’re eager to avoid it, quite often it seems to be what is most impacting the capital markets in the short term. The crisis has dragged on so long that it has become easy to start to ignore the details, so it is worth refreshing on what is coming up.

Next week, Greece will have to make a payment of about 300 million Euros to the IMF. This is likely to be made without incident, but it will increase anxiety and is already causing more Greeks to withdraw funds from bank accounts. Similar sized payments are due on the 12th, 16th and 19th. The European Council meets June 25-26, but they have another meeting in July so it is unlikely much happens at the first one. On July 20, Greece’s 3.5 billion Euro bond to the ECB is due. Here there is some risk. A default could cause the ECB to cut Greece off from the ELA, which is propping up the banking system.

So, by the end of July we may know if Greece is headed out of the Euro or if the problem will be delayed with more loans. Both are highly likely. European and IMF leaders have been increasingly suggesting they are more comfortable with a Greek exit. One can only imagine they are sick of the topic as well.

As for impact, it is hard to say. At this point it has been a known issue for so long it is hard to imagine preparations haven’t been made. Greece is only 0.4% of the world’s GDP and an even smaller part of the stock market. So it could be a non-event. Even if the Euro suddenly drops five percent, it is not clear there would be a major reaction in markets. There could even be a “buy on the news” reaction where a path to certainty lifts markets. For now, we’re stuck with the unknown and more of the same.

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