Having been neutral equities since early May, we cut back to a tactical underweight last week. The rationale for that risk reduction was essentially two-fold: material short-term from both the Federal Reserve and Greece. The position has not changed, but there has been news on both front...
The Federal Reserve
The June FOMC has come and gone without much market impact. A marginal reduction in the path of the “dot plot” was taken as a dovish signal (knee-jerk move lower in yields and the USD). 10 out of 17 FOMC members are still looking for at least two rate hikes before year-end, but there is a strong suspicion that Janet Yellen’s views are in the more dovish camp.
Did we learn anything particularly new? The Federal Reserve are still intending to start raising interest rates at some stage this year provided that we see “sustained moderate” growth; and they are still intending to move very gradually once the tightening process starts. After seven years of interest rates at zero, we see that looming policy tightening as likely to act as a drag on equities.
In summary, a deal between Greece and its creditors was only ever likely at the last minute, and we are now fasting approaching that point. After so many false deadlines, the EU leaders’ summit scheduled for Monday afternoon looks like the genuine “last chance saloon” for a default-averting deal to be reached. If that deal is not forthcoming, then a referendum on Greece’s Euro membership (under the protective umbrella of capital controls) rather than automatic Grexit seems like the logical next step. As stressed by Greece’s chief negotiator this week, “if we have don't [have a deal], we have to go to the Greek people because we have no mandate to leave the euro, and that would be a very bad eventuality”.
To read about our thoughts on the Greek saga in more detail, see Emiel and Hetal’s piece from earlier this week.