Euro Strengthens After Greece’s £7.4bn Bailout Deal
Euclid Tsakalotos, Greece's Finance Minister, Photo by Ververidis Vasilis, Shutterstock.
A confidence and supply deal between the Conservatives and the Democratic Unionist Party (DUP) is not expected to be completed until early next week or, even, after the Queen’s speech, revealed a senior Tory source. Theresa May faces criticism by Northern Ireland’s republican parties over her plans to form a minority government with the DUP. Gerry Addams, the Sinn Fein leader, said that the deal would compromise the Good Friday agreement.
The Euro strengthened after European Union (EU) officials and International Monetary Fund (IMF) representatives reached an agreement about the Greek financing problem. Almost £7.4bn will be disbursed so that Greece can honour its debt repayment obligations in July.
In the US, the selloff of major tech company stocks pushed the broader stock market lower. Some market analysts compare the last week’s selloff with the tech stock selloff that occurred in the late 1990’s. They note that both time periods had declining inflation and low interest rates, but they stress that in that time also, the Fed picked up its interest rate creating problems in the tech companies’ financing.
Pound Sterling – UK Markets
Today, Sterling strengthened against the US Dollar, trading at $1.27. The British Pound dropped against the Euro, trading at €1.14. Markets were surprised by the sudden shift of strategy of some of the Bank of England’s (BoE) Monetary Policy Committee (MPC) members during yesterday’s meeting to vote for the raise of its benchmark interest rate.
While analysts were expecting only one MPC member to vote in favour of picking up the interest rate, the vote turned out to be a 5-3 split, which was a totally unexpected outcome. The interest rate was kept unchanged, but the voting result indicates a shift in the BoE’s stance. The shift shows that the MPC members believe that the UK’s inflation rises much faster than expected because the value of the British currency is dropping.
The surprising voting result made the Pound rally yesterday, while market analysts started speculating about the possibility of an interest rate hike in the near future. Some of them suggest that the BoE may proceed with raising the rate as early as August. Investors would welcome a move like that because it would result in higher returns on capital.
US Dollar – US Markets
The US Dollar to Euro exchange rate was driven lower, trading at €0.89. The Fed’s raise of its benchmark interest rate seems to have taken a toll on the shares of tech companies.
Shares of Facebook, Amazon, Apple and Netflix closed lower, while Alphabet’s stock, which is Google’s parent company, was downgraded from “buy” to “neutral” by Canaccord Genuity, the largest independent investment dealer in Canada. Analysts suggest that Google’s ad load helped it to achieve revenue growth in the last two years, a trend which will be hard to continue because the company has decided it doesn’t want to overload users with more ads.
Market experts suggest that the continued selloff of technology stocks is happening because investors are getting worried about the Fed’s tightening policy and how it could get firms in trouble. As experts note, tech companies took advantage of the low interest rates in the past years, which resulted to cheap loans and the ability of a strong expansion. James Paulsen, who is an investment strategist at Wells Fargo, said that the fall in value of tech shares is “an overdue value adjustment.”
Euro – European Markets
The Euro strengthened against the US Dollar with the exchange rate set at $1.11. “White smoke” regarding the striking of a deal between European Union (EU) officials and International Monetary Fund (IMF) representatives over the Greek financing problem, boosted the single market currency.
Almost £7.4bn will be disbursed so that Greece can honour its debt repayment obligations in July. The Greek finance minister, Euclid Tsakalotos, said that “there is now a light at the end of the tunnel.” The deal doesn’t include a clear timeframe on when the debt-stricken Mediterranean country will be able to join the European Central Bank’s (ECB) quantitative easing programme, from which is excluded due to its vast debt. An ECB spokesman said that “we take note of the Eurogroup discussion, which we see as a first step towards debt sustainability.”
Christine Lagarde, the IMF’s managing director, said that the deal was the second best that could be made. The IMF agreed to back the Greek bailout programme in principle, but will only contribute funds when the EU will commit to a debt relief. The IMF suggests that it is impossible for Greece to run a budget surplus of 3.5% for the next years, as the EU projects, and has also called for an easing of the bailout terms.
Other Currencies – Highlights
Sterling lost small ground against the Australian Dollar for a second day in a row, trading at 1.68 AUD. A Bloomberg survey among Australian economists showed that they are divided when asked to predict if the Reserve Bank of Australia (RBA) will leave as it is now or increase its benchmark interest rate in the next twelve months. 12 out of 22 surveyed economists believe that the RBA will leave it stable, but 7 suggest that the interest rate will be higher by next June. The RBA is concerned about the weak economic growth and hesitates to pick up the rate, but is also reluctant to lower it because it is scared of a potential housing bubble.
The British Pound fell by 0.1% against the New Zealand Dollar, trading at 1.76 NZD. The New Zealand’s GDP data for the first quarter of 2017 disappointed experts, who were expecting better results. A report published by the Australia and New Zealand Banking Group (ANZ) notes that the GDP growth is disappointing and that this is a problem that has to be acknowledged by the Reserve Bank of New Zealand (RBNZ). The ANZ analysts suggest that the budget plan presented by the government a few weeks ago was slightly more expansionary than anticipated. They add that the housing market is cooling down, especially in the Auckland area.