While European markets finished higher yesterday some of the gloss was taken off a lot of yesterday’s gains when the IMF unexpectedly blew a giant hole in the recent optimism that had been generated by the reported “cash for reforms” speculation the day before. The announcement that IMF officials were walking away from the negotiations with Greece was as sudden as it was unexpected, as was the tone of the officials, who came across as extremely downbeat. In short the verdict was scathing, with officials citing that the gaps between the relative negotiating positions hadn’t been bridged at all. Despite the unexpected nature of the sudden stop to negotiations, markets reacted fairly calmly, however that could change in a crisis that has seen significant swings from optimism to pessimism and back over the years. The logjam appears to revolve around pension and labour market reform which Greece remains unwilling to compromise on, and when looking at the demonstrations that took place back in Athens yesterday it’s not hard to see why. Even if Greece does compromise on the issues the IMF wants change on, there is no guarantee that they would be able to implement them and therein lies the rub. All the while the clock continues to tick down with Greece due to repay €1.5bn to the IMF by the end of the month, and little or no money with which to pay, and time running short in which to come to an agreement with creditors for the release of new funds. It would appear that each side thinks the other is bluffing with Greek officials banking that US pressure could well see the EU compromise, or that Angela Merkel won’t want to go down as the German leader who oversaw the beginnings of the break-up of the single currency. At all key points of this crisis the German Chancellor has been renowned for her pragmatism, unfortunately for Greece this pragmatism may not stretch to those within her party, whose backing she would need to release any new funds. This belief looks set to be put to the test, given the uncompromising tone from the IMF yesterday, as well as other EU officials, who said the time for talking was over. There is a growing feeling that the day of reckoning is fast approaching and with German officials also in uncompromising mood, insisting that only a yes will do, it is hard to escape the perception that Greece is about to do the equivalent of bringing a knife to a gunfight. Over in the US we saw retail sales for May come in as expected at 1.2%, but we also saw some upward revisions to March and April, which have increased expectations that we could well see a move on rates in September. Today’s core PPI data could well guide further in this regard with an uptick expected to be seen in May from -0.2% in April to 0.1%, while the year on year figure is expected to rise to 0.9%. Recent data improvements make next week’s FOMC meeting that much more important as a signpost for a potential September lift off. It still seems too early to signal a change in both the Fed’s growth and inflation forecasts, and this surely needs to happen first before a move on rates. EURUSD – despite a brief dip below 1.1200 to 1.1188 yesterday the prospect of a rebound remains intact, with the 1.1050 level remaining the key support level. Resistance remains at this and last week’s high at 1.1380/90. A break through here has the potential to target the May highs at 1.1480. GBPUSD – the pound continues to remain resilient closing above the 200 day MA for the second day in succession. Having broken above 1.5400 we remain on course for a move towards 1.5600, as well as the May highs at 1.5815. EURGBP – currently finding support at the 50 day MA at 0.7240 we could well head towards the 0.7220/30 area, while the 0.7380 level caps. USDJPY – the break below the neckline support earlier this week at 124.05 and the 123.60 level opens up the prospect of a move towards 121.80 as the recent topping pattern alluded to yesterday played out. The 124.20 neckline level should now act as resistance on any pullbacks. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
IMF calls Greece out
20:00, 11 June 2015