One down, five to go...

Reports this morning that Greece reaches a breakthrough agreement with its creditors amounting to the disbursement of EUR 10.3 million.  The big news is that it appears IMF have made some major concessions here regarding debt relief ,  which I argue is an absolute necessity for Greece to ever recover.

Markets are up this morning as it eliminates a key summer risk.  Above all it shows a better negotiating climate on behalf of the Greeks and creditors, probably a sign that all parties are just too weary of a repat of last years malarkey which in the end didn't achieve much other than costly drama.

IMF board still needs to approve the deal but this is a formality.   Up next on the risk monitor is the Fed decision on June 15th and Brexit vote on June 23rd.

Expect an Eventful Summer

I've been keeping a low profile lately to observe the market development which mostly has been characterized by marginally positive to neutral sentiment. Equities somewhat higher,  oil has rebounded up to $50 supporting the energy sector / utilities and providing a degree of confidence to EM oil producers. Last but not least IG credit is stronger , supported by ECB's new corporate bond purchase program.  

My only transaction has been to buy some more Kinnevik B share now that they've dipped to 225kr and to average down my purchase price.  This holding to me is "off-benchmark" in that it is more in the future growth category than dividend income, but I believe long-term it will satisfy both objectives.

I believe the saying "sell in May and go away"  will apply to 2016 as well.  There are several reasons why i believe a 10-15% correction is coming in June-July.

1. Fed hike possible - June 15 Fed Chairwoman Yellen signaled on Wednesday it may actually hike in June and that two hikes remain on the table for 2016.  The market is clearly under pricing the probability of a June hike.  Market implied probabilities for a June hike  jumped from 5% to 30% post release of the minutes.  It should perhaps be higher yet...    A hike on balance should be equity valuation negative, particularly for div income stocks
2. Brexit Referendum - June 23.   Much already been said about this.   Polls say 40-45% chance of a brexit while Bloomberg's "superforecasters" suggest a much lower risk at 25%.  In any event,  a Brexit vote would have drastic and unpredictable consequences to the market as it introduces considerable uncertainty to Britain, Europe and indirectly the world.  With such a risk on the horizon,  why risk investing before this event? 
3. Greece/IMF. - Jun 7-Jul 20  Will there be a new standoff between the creditors and Greece this summer as a repeat of 2015? I think not, but it may still get messy with delays and broken promises which will spook markets. The added spice here is a disagreement between IMF and the EU led by Germany. The IMF wants to grant some debt relief now, while Germany wants to delay it until 2018 or later, effectively kicking the can down the road to appease German voters and southern European governments which have sold their people the virtues of austerity.  Greece is so indebted, the only solution to a bankrupt state is debt relief to give some chance of growth - moral hazard or not, the country is too far gone.  GDP of €176bn cannot carry a debt burden of €300bn (170%) even if the debt is spread out over 40 years. With zero or negative growth, there is no scenario in which Greece can "grow" its way out of the problem - and inflating away debt looks unlikely.  
   
   According to the WSJ, next key dates are  (WSJ Article on Greece Debt)
• Jun 7-  IMF- €300m  (2010 rescue)
• Jul 13- IMF - €449m (2010 rescue)
• Jul 20 - EU -  €3260m (two tranches)
  
  EU needs IMF in the program to maintain fiscal discipline.  Without agreement with the IMF, there will be now disbursement by the EU.  In total some €4bn due over summer. It could get messy.   
4. General over-valuation - Now.   Considering markets are already "toppish" with lower revenue and earnings, valuations look high and ought to come down.  Share buybacks cant continue for ever.  This is to say that on balance, risks are to the downside.  It would take some markedly good news about inflation or global growth to warrant higher indices.  There are of course bright spots, but overall equity indices are on the high side.
5. US election -  Republican Convention July 18-20 .  Elections are Nov 8,  which in itself could be a disaster if the Donald is elected, but there are market risks even in the near term.  If Trump is officially selected as the Republicans candidate at the convention on July 18-20.  What happens if Cruz (or someone else) is selected without popular support?

With so many "risky events" scheduled over the summer, I certainly plan to kick back on the sidelines with a cold beer and enjoy the footy Euro Championship, in waiting for a good entry.

Trump on Cruz control

The Unstoppable Donald.

So the moment we never thought would happen has arrived.  After winning Indiana, Trump is now the de facto Republican nominee after Cruz's withdrawal from the race last night.  It will be tough now for the Republican establishment to ignore Trump and declare it a contested convention but will see.   Kasich remains in the race as as an alternative although I don't see why, he is hopelessly behind The Donald.

Feelin' the Bern.

On the Democrat side,  Bernie Sanders won in Indiana defeating Hillary Clinton and making the race more event than supporters of Mrs Clinton want to make believe.   Put simply,  Bernie inspires and speaks truthfully to voters about change and injustice,  while Hillary fails to properly connect and excite voters. Yet she brings experience and is a seasons political operator who probably can bring about change effectively in her own way.  Whether that's what the electorate wants or not is another matter

Its going to be an exciting September.  

A Crude Awakening...

Encouraging to see oil price rise for the third consecutive week in April.   WTI now up $10/bbl to over $45 today from around $35 early April.   Also some $20 above the decade lows of $26.2 observed on 11 Feb 2016.   Its a politicized commodity so i have no idea what is driving price movement, in particular after the OPEC Doha talks failed on April 18.

In any event, I welcome the rise to more normal levels around  $50-60 which should reduce stresses in the global economy and hopefully (if not too late) reduce default rates in the credit HY market, which in the US and Norway is especially exposed to the energy sector.  Last but not least,  higher oil prices will again accelerate change towards renewable and more sustainable energy sources and relative dependence on unstable regions.

Good news for Fortum and other electricity producers...
And on a personal level,  it certainly helps the share price of one of my  div-yielding paying stocks - Finnish utility Fortum, which is majority owned my the Finnish State and has taken a real beating over last 12 months due to 1) declining wholesale electricity prices and 2) sale of Swedish and Finnish grids.

Will be interesting to see if oil can maintain some stability around these levels or in the $40-60 range.. that surely is a good outcome for all sides.

Pound showing signs that Brexit fears may be overdone..

Maybe President Obama did it?   Certainly feels like the Bremain campaign is gaining momentum with commercial, political, even Hollywood (Patrick Stewart sketch by the Guardian), weighing in on the side of reason.

Bloomberg's chart today shows a sharp fall in cable volatility to around -1,  dropping the most since May 2015.  You can see the good 11 day run since the 15th of April in chart below, with the British Bulldog currency gaining almost 3% over this period.

I believe we will see a continues slow upward appreciation, with cable above 1.50 and GBPSEK above 12.0 just before referendum unless a dramatic change in polls.

Oh and here is the sketch with Patrick Stewart (funny if you are a fan like me of Monty Python)  Patrick Stewart - What has the ECHR ever done for us?

"Friends don't let Friends drive drunk"

Obama weighs in on the Brexit debate in a 3 day UK visit clearly voicing an opinion that UK is stronger in the EU that outside.

BBC Video Interview on Brexit

It may yet backfire to have an outgoing US president to influence a UK referendum of this nature, but my hunch is it will help influence the 20% or so that are still undecided over to the Remain side.

Those firmly in favour of Brexit will only have had strengthened their resolve to leave by Obama's explicit comments.  

With around 2 months to go the vote and following Obama's visit, i lower my probability of a Brexit from 40-45% to 30-35%.  This should support the Pound in coming weeks,  and we have already seen some upward creep in Cable, but suspect this main movement has yet to occur following the vote.  

Risks are however asymmetrical, and  skewed to the downside if indeed we wake up to a positive Brexit vote on June 24th.

Central Bank Action Today - ECB and Riksbanken

9.30 CET today Swedish Riksbank will announce monetary policy.  A split committee will may vote in favour of continuing QE via bond purchases beyond the current 30/6 end date in a bid to weaken the SEK vs EUR and boost a moribund inflation rate.   The hawks will argue against further intervention in particular after Riksbankens strong move in February to cut rates further into negative territory by slashing 15 bps.

Later in day ECB is unlikely to move rates at this meeting, opting to save their powder for summer / post summer turbulence.  Instead Draghi will probably engage forward guidance (or as Mohammed el Erian calls it - "linguistic gymnastics") to keep the Euro weak which is not easy.

On a side note, continued dovish rhetoric from the ECB has knock-on effects on other smaller European but non-euro countries, clearly influencing the decision makings by their central banks such as the Riksbank in Sweden which is pressurized to act in kind to maintain relative weakness.

Interesting comment from Bob Janjuah today on currency wars:  Bob Janjuah Blog - Currency Wars