Global Markets

Greece remained the overriding story this week with the situation shaking markets. But how the saga will conclude is far from clear, giving rise to divergent investor moves. Even China's plunging equity markets have been pushed to the side as investors watched the deteriorating — as if it could get much worse — situation in and with Greece. However, there was other news in this U.S. holiday shortened week. The Shanghai Composite continued its journey into bear market land despite moves by the People's Bank of China last weekend. And there was the U.S. June employment report on Thursday (a holiday in the U.S. on Friday) that offered a distraction from the Greek saga for a portion of the day.

The negotiations ended and now there is a war of words pitting the Greek government on one side and various euro leaders on the other. After Greek Prime Minister Alexis Tsipras called for a referendum on the proposal from the Eurogroup (finance ministers of the Eurozone), German Chancellor Angela Merkel said there would be no negotiations until after the referendum which is scheduled for Sunday, July 5th. This past Thursday, Dutch Finance Minister and Eurogroup President Jeroen Dijsselbloem warned that if Greece votes to reject the terms of a bailout, Greece faces having no place in the Eurozone. Speaking to a parliamentary committee, Mr Dijsselbloem hit back at the notion that a 'No' vote could be used as the basis to return to negotiations. Earlier on Thursday, the minister's Greek counterpart Yanis Varoufakis said there would still be an agreement with creditors if voters vote 'No'. He pledged to resign if the people vote in favor of the deal.

In the past few days, Tsipras blew up negotiations with European creditors on staving off default, then retreated and accepted more or less the same terms, only to have European leaders tell him the offer had expired. The vote may be coming but no one in Greece or elsewhere for that matter, seems sure what they will be asked or what the consequences will be for voting yes or no. For now, capital controls have been instituted and banks have been closed for at least this week.

The crisis appears to simultaneously vindicate critics' complaints that Greece's left-wing governing party, Syriza, is flailing about with wild gambits, but also that Europe, led primarily by the German leader Angela Merkel, is obsessed with rules and procedures that have resulted in a long string of emergency meetings but no clear plan for addressing the Greek debt crisis.

According to a new report by the International Monetary Fund, Greece needs more than €60 billion in new financial help over the next three years and faces decades of living in the shadow of a daunting debt mountain that would make it vulnerable to future crises. The IMF laid out Greece's economic dilemma in stark terms and called on Thursday for Europe to grant the country "comprehensive" debt relief, arguing for the doubling of the maturities on its debts from 20 to 40 years.

But at the same time, the IMF also placed much of the blame for the country's deteriorating situation on the current Syriza-led government in Athens. Before the administration of Prime Minister Alexis Tsipras took power in January, the Greek economy had been returning to growth and slowly progressing on returning its debts to a sustainable path. But the government's decision to halt reform and privatizations and try to renegotiate the terms of its European-led bailout have caused a significant worsening of the situation. And the decision last week to call a referendum followed by the shutting of banks and the introduction of capital controls have only made the situation worse.

An update on global manufacturing

Final June manufacturing PMIs were mixed globally as growth in the sector remained subdued. The June global reading decelerated mildly to 51.0, its lowest since July 2013. Over the second quarter, average rates of expansion in both global manufacturing production and new orders were the weakest since the second quarter of 2013, further highlighting the generally subdued performance of the sector in recent months.

However, output advanced for the 31st consecutive month. Growth was again recorded (on average) in North America and Europe, in contrast to a mild decrease in Asia. The expansions in the U.S. and the UK (among the leading lights of global manufacturing earlier in the year) cooled in June, with production growth at a 17-month low in the U.S. and a 26-month low in the UK. Japanese output edged higher for the second successive month while conditions continued to improve in the euro area. However, among the major emerging markets, output fell slightly in China and Russia, but rose in India, Mexico and Vietnam. Brazil's severe downturn in manufacturing production continued.

In the Eurozone, the manufacturing PMIs picked up everywhere except in Greece. In France, the index climbed over the 50 breakeven point between expansion and contraction for the first time in 14 months. Germany was up albeit from a low index reading. While the readings eased in Italy and Spain, they are still signalling expansion.

People's Bank of China cuts lending rates

The People's Bank of China cut lending rates for the fourth time since November and trimmed the amount of cash that some banks must hold as reserves, stepping up efforts to support an economy that is headed for its poorest performance in a quarter century. The combined easing highlights Beijing's concerns that money isn't flowing to some of the most needed sectors in the economy and that stubbornly high borrowing costs could fuel bankruptcies and job losses. The last time the central bank simultaneously cut interest rates and reserve requirements was at the height of the global financial crisis in late 2008. The latest move could also be aimed at comforting investors following the plunge in the country's stock markets.

The PBoC lowered the one year benchmark bank lending rate by 25 basis points to 4.85 percent and reduced the one year benchmark deposit rate by 25 basis points to 2 percent. The Bank also lowered the reserve requirement ratio (RRR) by 50 basis points for banks that have met certain standards in lending to the farm sector and small and medium-sized enterprises. It lowered reserve requirements for finance companies by 300 basis points, which it said will help ease funding and cost pressures on state owned enterprises. The central bank has frequently made such targeted cuts in RRR to spur lending into certain sectors, but the impact has been limited since banks are often reluctant to lend to these sectors amid concerns over collateral and risk.

China last cut interest rates on May 10. It last cut the reserve requirement ratio for all commercial banks by 100 basis points on April 19 which was the deepest single reduction since the depth of the global financial crisis in 2008 and followed a 50-basis-point cut in February. The PBoC has cut benchmark lending rate by a total of 115 basis points since November, on top of a total of 150 basis cuts in system wide reserve requirements.

The press office of the People's Bank of China did not respond to a question of whether the actions were related to the stock market drop. But some officials at the PBoC said the bank had to respond to the severe market drop as maintaining the country's financial stability is part of its job.

Global Stock Market Recap

Europe and the UK

European equities fluctuated on optimism/pessimism regarding the outcome of the election in Greece on July 5th. Investors appeared grateful when there were signs of negotiations between Greece and the Troika and the indexes rose. Setbacks sent equities down. On Thursday, the CAC and DAX retreated as arguments on both sides continued unabated. With one trading day left before the election, investors were exercising caution. Through Thursday, all indexes retreated. The FTSE was down 1.8 percent, the SMI retreated 0.5 percent and the CAC and DAX dropped 4.4 percent and 3.4 percent respectively. All indexes also declined for the month of June. Losses ranged from 6.6 percent (FTSE) to 4.0 percent (IBEX).

The Eurozone finance ministers and the group of international creditors have put off further negotiations with Greece until the outcome of the Sunday referendum and rejected any bailout extension. In a letter to Greek Prime Minister Alexis Tsipras, Eurogroup President Jeroen Dijsselbloem said there is no ground for further talks at this point given the political situation, rejection of the previous proposals, the Sunday referendum and the Greek government's recommendation to vote 'No'. Further he said that there will be no talks in the coming days, either at the Eurogroup level or between the Greek authorities on proposals or financial arrangements. He said that the Eurogroup will simply await the outcome of the referendum and take into account the outcome of that referendum. German Chancellor Angela Merkel also has reiterated her position that any new talks will have to wait until after the Greek referendum on Sunday.

Asia Pacific

Like investors elsewhere, traders here were transfixed by the machinations between Greece and its fellow members of the Eurozone. The drop in the Shanghai Composite did not particularly drag down other indexes in the region. For the week through Thursday, indexes were mixed. The Shanghai Composite sank three of four days to plunge 6.7 percent. Elsewhere, the Nikkei retreated 0.9 percent and the Hang Seng, 1.4 percent. For the month of June, all indexes covered here declined with the exception of the SET. Among the big losers in June were the Shanghai Composite (down 7.3 percent), Jakarta Composite (down 5.9 percent), the All Ordinaries (down 5.6 percent) and the Hang Seng (4.3 percent).

The plunge in the Shanghai Composite has been breathtaking — on June 12th the index was up about 59 percent in 2015. As of today, it is up just 21 percent. And the index continued to fall even as the country's securities regulator relaxed rules on margin trading as part of efforts to curb downward pressure on the market. On Thursday, the Shanghai Composite plunged as much as 6.4 percent early in the day before recouping some of its loss to end the session down 3.5 percent.

World Bank on China

The World Bank predicts the services sector will account for more than half of China's economic growth by 2017 as the economy modernizes from an industrial powerhouse to a consumption based society. In a 39-page report, the organization said gross domestic product growth would continue to slow during this transition. Last year GDP grew 7.4 percent, the slowest expansion since 1990. The World Bank forecasts a 7.1 percent pace this year and said growth is likely to slip to 6.9 percent by 2017. It said this cooling is "desirable," as Beijing looks to find a more sustainable footing after years of rapid credit growth, shadow banking-fueled growth and a rise in household borrowing. China's GDP was up 7 percent on the year in the first quarter. Second quarter results are due on July 15th.

Currencies

The U.S. dollar was up against its major counterparts in the holiday shortened week with the exception of the yen. On Thursday after the June employment report was released, the currency initially stumbled against the euro and the yen after U.S. data indicated the labor market's gains remain uneven and continue testing expectations once again for a higher fed funds rate in September.

Much of the dollar's move on Thursday stemmed from investors who had been hoping for a surge in the report but were disappointed. Solid numbers for the ADP payrolls report, the Institute for Supply Management's manufacturing employment index and recent weekly jobless claims had ramped up expectations for stellar jobs numbers in June. Given signs of recent caution by the Federal Reserve as well as uncertainty over the outcome of the Greek referendum on Sunday and the country's future in the euro area, the market has discounted a September liftoff date for interest rates. Higher borrowing costs in the U.S. would draw more yield-hungry investors to the dollar, especially as Europe and Japan are moving to stimulate their economies through looser monetary policy.

Commodities

On another note, the recent stabilization in global oil prices is prompting U.S. shale producers to raise output again. The number of rigs drilling for oil in the U.S. increased by 12 to 640 in the week to July 2nd, according to the latest data from oilfield services company Baker Hughes. This is the first time in 29 weeks that the number of oil rigs operating in the U.S. has risen and suggests that oil companies may be ready to bring rigs back into service after having aggressively slashed their numbers since the start of the year.

Selected currencies — weekly results

Indicator scoreboard

Eurozone

June flash harmonized index of consumer prices was up 0.2 percent on the year, down from 0.4 percent in May. The drop was the first since the rate bottomed in January after the oil price collapse. Core prices essentially followed the yearly headline move with both the ex-food, alcohol, tobacco & energy and the ex-unprocessed food & energy rates also slipping 0.1 percentage point to 0.8 percent. The main downward pressure came from services, where inflation was off 0.3 percentage points at 1.0 percent, and energy where the rate was minus 5.1 percent after minus 4.8 percent last time. Elsewhere, food, alcohol & tobacco held steady at 1.2 percent but non-energy industrial goods climbed 0.2 percentage points to 0.4 percent, still very soft but easily its highest mark so far this year.

May unemployment rate was unchanged at 11.1 percent. The lack of volatility reflected a modest 35,000 decline in the number of people out of work to 17.726 million. Youth unemployment made better progress, the rate here declining 0.2 percentage points to 22.1 percent. Regionally the national unemployment rate as calculated by Eurostat was unchanged at 4.7 percent in Germany and at 12.4 percent in Italy. It fell a further 0.2 percentage points to 22.5 percent in Spain but was up a tick to 10.3 percent in France to match its recent March high. Top of the jobless ladder was again Greece (25.6 percent in March).

Germany

June unemployment declined 1,000 on the month and left the jobless rate at 6.4 percent, matching the level seen since March. The number of people out of work now stands at 2.786 million. June's minimal drop means that joblessness over the second quarter was down just 14,000 or some 27,000 less than seen during the first three months of the year. This points to some loss of economic momentum although with vacancies up a further 8,000 on the month after a stronger revised 10,000 increase in May, the likelihood is that skills shortages are becoming more of an issue for employers.

France

May household spending on manufactured goods was unchanged on the month following a marginally firmer revised 0.4 percent increase in April. Annual growth of purchases was 2.6 percent, up from 2.1 percent last time. Total spending was fractionally stronger, posting a 0.1 percent monthly gain after having shown no change in April. Sales were boosted by a 0.2 percent monthly increase in autos and a 0.1 percent gain in the other manufactured products category. However, offsets came from household goods (down 0.6 percent) and textiles (down 0.3 percent). The decline in household goods came after 0.2 percent declines in both March and April and probably in part reflecting a very weak housing market.

United Kingdom

The final estimate of first quarter gross domestic product expanded an upwardly revised 0.4 percent on the quarter. However, the modest adjustment came as part of some significant changes to the way in which construction output is calculated which saw annual growth revised up fully 0.5 percentage points to 2.9 percent. Real GDP in the fourth quarter of 2014 is now estimated to have expanded a quarterly 0.8 percent, a couple of ticks more than previously indicated. The new national accounts show household consumption up 0.9 percent on the quarter and gross fixed capital formation 2.0 percent firmer. General government consumption also increased 0.9 percent and total domestic expenditure was 1.0 percent to the good. However, with exports gaining only 0.4 percent and imports 2.3 percent higher, net exports had a sizeable negative impact on growth. The first quarter current account deficit was put at 5.8 percent of GDP and, after revision, at 5.9 percent in 2014, the largest on record and a timely reminder of why policymakers and industry alike would like to see a weaker pound.

Asia/Pacific

Japan

Retail sales were up a greater than expected 3.0 percent in May from a year ago. Sales had rebounded 4.9 percent in April after sinking 9.7 percent in March. All major categories with the exception of fuel were higher in May. Most were up for a second month, however the gains in May were uniformly smaller than in April. Motor vehicle sales were up for a second consecutive month, this time by 4.9 percent on the year after increasing 7.9 percent in April. Machinery sales also advanced for a second month. They were up 9.1 percent after 11.1 percent in April. Food and beverage sales increased 4.9 percent after 6.2 percent while apparel sales added 4.6 percent after April's 5.1 percent. Still reflecting price declines, fuel sales slumped 12.3 percent after declining 9.1 percent in April.

In May, industrial production dropped a greater than expected 2.2 percent on the month and declined 2.4 percent from the same month a year ago. The monthly decline was the third in 2015. Expectations were for a mild 0.8 percent monthly drop. Transport equipment was down 5.4 percent after increasing 0.6 percent in April. This was the third monthly decline in 2015. Chemicals (excluding drugs) dropped 6.1 percent after climbing 0.4 percent the month before, most likely reflecting lower commodity prices and weak investment spending. Electronic parts and devices slumped 4.3 percent after gaining 5.4 percent the month before. According to the survey of production forecast in manufacturing, production is expected to increase 1.5 percent in June and increase 0.6 percent in July. Expectations are that the industries that are most likely to contribute to the June increase are information & communication electronics equipment, transport equipment and general-purpose, production & business oriented machinery.

The Tankan survey, which takes the pulse of 10,500 businesses for sentiment and capital spending plans, showed manufacturers and nonmanufacturers alike were more optimistic than forecast in the June quarter. Large manufacturers climbed to 15 from 12 in the first quarter — expectations were for a reading of 12. The reading for small manufacturers who primarily serve the domestic market was zero after plus 1 in the first quarter. Medium size manufacturers reading declined to plus 2 from plus 4. Large nonmanufacturers retreated to 34, down from 36 last time while small nonmanufacturers eased to 11 from 15. The all-industries capital expenditures for large companies jumped to 9.3 percent, the highest figure since the final months of 2007. The overall assessment of business conditions held steady at 7, ahead of forecasts at 5.

Bottom line

June's manufacturing PMIs continued to show tepid growth globally. Key data in the form of the quarterly Tankan survey from Japan indicated that businesses were more optimistic than they were last quarter. Although the June U.S. employment gain closely matched expectations, downward revisions to the prior two months left analysts disappointed.

Both the Reserve Bank of Australia and Bank of England hold monetary policy meetings. Neither central bank is expected to change current policies. Merchandise trade and industrial production data dominate the indicator schedule in Europe. China begins to release its June data, beginning with consumer and producer price indexes. Canada and Australia release their respective labour force surveys for June. Investors will be focused on the events following Sunday's referendum in Greece.

Looking Ahead: July 6 through July 10, 2015

Anne D Picker is the author of International Economic Indicators and Central Banks.