Market Perspective for July 6, 2015

Greek voters gave their government a vote of confidence when they soundly rejected the latest bailout offer in a referendum on Sunday. Polls indicated that the vote was going to be competitive, but ultimately the “No” vote won 61 to 39 percent. It was a resounding victory by region as well: not a single region voted “Yes.” The vote was largely symbolic as creditors had revoked their offer on Tuesday. Nevertheless, voters have sent a clear message that they support the government’s negotiating position.

Greek financial minister Yanis Varoufakis resigned in the wake of the victory at the polls. European creditors disliked negotiating with him and went so far as to call him “toxic.” By taking himself out of the game, Varoufakis has increased the pressure on creditors.

Negotiations will resume on Tuesday with Greece currently rumored to be building a proposal based on Europe’s last offer. The constraints of the old negotiations remain: creditors cannot offer too lenient a deal to Greece due to fears that Spain, Italy, Portugal, Ireland and any future debtors may demand similar treatment. The Greek voters have sent a clear signal that they support the current government and outside creditors will not determine political outcomes within the country.

The markets are surprisingly calm considering these events. This is a positive sign, though it could also be due to confusion about the immediate future. Global X Greece (GREK) fell early in Monday trading but it did not reach the lows hit last week. The euro dipped following the results of the vote and then rebounded and stabilized.  U.S. markets dipped overnight and opened lower, by an amount that is well within a normal daily trading range. European shares are off a bit more, down 1 to 2 percent on the major indexes, but still not overly concerning. The unfolding events in Greece may turn more serious in the days ahead, but for now, markets are taking the news in stride.

This week is relatively light on economic data, though two important pieces of data for determining GDP growth in the current quarter will be available this week: trade deficit and wholesale inventories, both for May. The former is out on Tuesday, while the latter will be released on Friday. The Atlanta Federal Reserve raised its GDP Now forecast of GDP growth in the second quarter to 2.2 percent last week. The minutes from the last Federal Reserve meeting will be released on Wednesday.

Earnings season unofficially kicks off this week with Alcoa (AA) reporting results on Wednesday. The firm marked the start of earnings season when it was a Dow component but since being removed from the index, its earnings are not as closely followed. Pepsi (PEP) will report on Thursday, as will Walgreens (WAG).

Oil prices have broken down in the past few days, moving below a tight trading range in effect since early May. As far as the U.S. stock market is concerned, this dip in oil prices is having a greater impact than Greece on the market, by pulling the energy sector lower. Copper prices also broke lower on Monday and are now close to 5-year lows. The decline in the Chinese stock market may be dampening optimism in the metal. Copper prices rallied from a low below $2.50 up to $2.90 this year, but are back to $2.52 in Monday trading. China’s main stock index managed to move higher on Monday, following a barrage of government bailout measures including central bank support for margin loans and direct buying by financial institutions. Gains were concentrated in the largest shares, such as the government owned banks and oil companies. The small-cap ChiNext index fell to a new post-high low.

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