“Wisdom Begins In Wonder” -Socrates

 

TSX Back In Positive Territory as Global Concern Eases

North American markets posted solid gains Friday as traders took in encouraging developments in the Greek debt negotiations and a rebound on Chinese markets that continued to gain traction. The S&P/TSX composite index closed up 132.58 points at 14,411.07, as the latest employment survey from Statistics Canada showed a big increase in full-time employment in June despite an overall loss of 6,400 jobs as 71,200 part-time positions were eliminated. In New York, Dow Jones industrial soared 211.79 points to 17,760.41, although the widely watched index ended the week only slightly above where it started. The Nasdaq shot up 75.30 points to 4,997.70 and the S&P 500 advanced 25.31 points to 2,076.62. The Canadian dollar rose for a second consecutive day, up 0.17 of a U.S. cent to 78.87 cents. Meanwhile, Greece and its creditors appeared to be narrowing their differences after Athens offered an austerity package that included concessions in key areas such as tax increases and cuts to pensions.

 

Greek Drama in Context

The Greek drama is likely to be a source of uncertainty and volatility for global financial markets over coming days and, perhaps, weeks. The Eurozone is considered to be in a better place today than it was during these prior stressful episodes. Four key reasons support this view.

There is small direct economic linkages. The Greek economy represents 1.9% of Eurozone GDP and an incredibly small end-market for major-economy exports (e.g., 0.1% of GDP for France, 0.1% for Spain, 0.2% for Italy, and 0.2% for Germany).

Eurozone economies are in a better place to absorb shocks. Fiscal pressure is receding as many of the formerly weak links such as Italy, Ireland, Spain and Portugal make progress on structural budget balances. At the same time, these economies are beginning to grow once again and have shifted their current accounts into net creditor positions.

Private Sector financial exposure is modest. According to Bank for International Settlements’ data, total foreign claims on Greece have declined by 70% since 2009 to a manageable level of about €65 billion (~US$73 billion). Note that the private sector holds only €63 billion of Greek debt, of which €18 billion is held by non-Greeks.

Stronger firewalls are in place. After €250 billion in capital raises since 2008, Eurozone banks are much stronger than they were in 2010-12. At the same time, the Eurozone now has several facilities in place to limit the impacts of illiquidity and/or a financial crisis. These include a €500 billion crisis resolution mechanism , the Outright Monetary Transactions facility whereby the European Central Bank (ECB) can purchase bonds in the secondary market in order to stop a downward spiral in sovereign bond prices, and Quantitative Easing which is a central bank tool used to prevent price deflation from hampering a country’s efforts to right size over-indebtedness.

 

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Sources: Bloomberg; Investment Executive; advisor.ca