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Markets

Investors remain off balance.  The Greek financial crisis, and the future of the irrevocable monetary union will take a few more days to play out.  The Chinese stock market’s dramatic fall after an incredible bull move continues, and nearly half of the stocks have been suspended. China’s woes, plus some of their own developments has kept the downward pressure on key industrial commodities, including oil, copper and iron ore.
The dollar itself is mixed.  The yen’s ability to weather volatility in the financial markets continues to b demonstrated.  It is up around 0.8% against the dollar after the Nikkei plunged 3.4%. It is the stock market’s biggest decline of the year, and US Treasury yields fall.  The 10-year yield was below 2.2% after peaking near 2.45% last week.  The 100-day average is near 2.13%.  The Nikkei is now at two-month lows and just above the 100-day moving average (~19694), which it has remained above since the last October’s surprise decision to accelerate QE.  The dollar is also at its lowest level against the yen since late-May.  The 100-day moving average is found just above JPY121.00.
The euro is enjoying a little reprieve.  After nearing $1.09 yesterday, it has tested the $1.1050 area today.  The steadier tone seems to be a function of short-term tactics as previously sold positions are covered with an eye toward reselling at better levels.  There are contradictory signals of what to expect in the coming days, but trying to make sense of it suggests the following timetable:
1.  Today Greece submits a formal request for a two-year aid program (reports suggest that this has been delivered)
2.  Tomorrow Greece provides the list of reforms it proposes in greater detail
3.  Friday, if the Greek proposals pass the official creditors muster, Merkel will seek parliamentary approval to begin negotiations
4. Saturday Eurogroup of finance ministers meet
5. Sunday, the heads of state of all 28 EU countries meet to discuss Greece, short-term funding and humanitarian aid.
In the meantime, the ECB meets today to review Greece’s ELA.  Draghi reportedly informed the Eurogroup that Greek banks have sufficient funds to last until the end of the week, but not much longer.  Recall that this past Monday, the ECB kept the ELA cap the same but raised the discount applied to the collateral used for the borrowings.  However, some in the media misunderstand this.  It is not, for example, as Bloomberg says to “protect its balance sheet”.
To the contrary, the risks of ELA lending is totally borne by the national central bank, not the ECB or the Eurosystem.  At best, the ECB’s objection is either central bank funding of the Greek government indirectly, or that Greek banks are insolvent.  This latter judgment would require an end to ELA completely.    In any event, the timetable roughly sketched out above means that the ECB will not move to the latter step yet.  However, it means that the bank holiday is likely to continue through at least the end of the week,
Meanwhile, Chinese stocks continue to sell-off.   Shanghai lost nearly 6%, and Shenzhen fell 2.5%. An increasing number of companies are suspending the trading in their shares.  Margin calls are exacerbating the slump.  Many see the sharp decline in iron ore and copper prices to be related through the use of commodities as collateral for equity purchases had been reduced.  Retail investors dominate trading Chinese shares, and the adverse wealth effect is likely to be a new weight on the economy.  It is in this context that some will see the first decline in vehicle sales in China in two years (-3.2% year-over-year in June).
The weakness in commodities, soft domestic data, concerns about the broader knock-on effect from China, and RBA persistent jawboning keeps the Australian dollar under pressure.  It has recorded six consecutive sessions of lower lows.  Today it was pushed through $0.7400 before some profit-taking kicked in to lift it back toward $0.7430.  It looks capped near $0.7450.  Tomorrow Australia reports its monthly jobs data.  A constructive report will likely lend support to the Aussie.
Sterling too has not seen the reprieve that the euro has.  It too has recorded lower lows for six sessions.  Today it is probing below $1.54 after have been near $1.58 at the end of last month.  It has been pushed below its 200-day moving average (~$1.5440).  The 100-day average is near $1.5275. A restrictive budget could push out BOE tightening expectations.  The June 2016 short-sterling futures contract continues to rally.  Today the implied yield is 89 bp.  Last Tuesday it was 108 bp.   Sterling’s underperformance appears to be, at least in part, payback from the market getting ahead of itself in terms its expectations for BOE aggressiveness.
The Federal Reserve’s minutes from last month’s meeting will be released today.  Remember the dot plots showed more than half of the Fed still saw two rate hikes as appropriate this year and nearly all saw at least one hike.  The FOMC statement was not as dovish as the market read the dot plots. The Fed has said nothing to rule out a September hike.
Before the FOMC minutes, the Department of Energy will report the latest production and inventory figures for oil and products.  Industry figures suggest US output this year will be greater than previously anticipated.  US companies continue to pursue technological improvements that lower the cost of production.  Re fracking (fracking old wells) is apparently among the latest developments.  Meanwhile, the talks that could lead to more Iranian output in the world markets were extended (again) at least through the end of the week.

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