In the first day of her semiannual testimony on Capitol Hill, Federal Reserve Chair Janet Yellen downplayed concerns over foreign crises on the U.S. economy, saying that underlying fundamentals were strong enough to support a start to tightening later this year. Yellen also indicated that the pat of rate hikes will be slow and steady, insulating markets from policy shocks. With the Fed indicating that rates will rise in the near term and central banks in other major economies continuing to pump liquidity, the U.S. dollar has pared nearly all its losses against major currencies after reaching a 12-year high in March of this year. While analysts are divided as to whether the dollar can continue to appreciate from current levels, the resurgent greenback will likely continue to feature in discussions of forward guidance as earnings season continue for U.S. equity markets.
Greek parliament approves bailout terms. Late yesterday evening Greece’s parliament voted to accept the bailout proposal secured by Prime Minister Alexis Tsipras. If the proposed terms are also accepted by the national legislative bodies of other euro zone members as expected, a new €7 billion ($7.62 billion) loan tranche may be announced as early as Friday. With its national economy in tatters, Greece is desperate for the liquidity. Of the 149 Syriza members of parliament, 32 voted against accepting the austerity measures, including Yanis Varoufakis, who resigned his post as Greek finance minister earlier this month. Separately, European Central Bank president Mario Draghi expressed support for the bailout plan in advance of today’s ECB meeting in Frankfurt.
Puerto Rico fails to make payments. Puerto Rico’s Government Development Bank (GDB) yesterday announced that the Public Finance Corp., an agency of the U.S. island commonwealth, had failed to make a required $93.7 million debt-service payment to a bond trustee due on Wednesday. An additional payment of $36 million comes due August 1. A failure to make that payment could constitute a default. The island’s legislature approved roughly $300 million for GDB debt payments within the current budget that were not specific to the current payments. It is possible those funds could be reallocated.
Pound sterling hits multiyear highs. With tightening on the horizon in the U.K. and extended easing by the ECB likely as the euro deals with a Greek hangover, the pound made a seven-year high against the euro this morning.
Goldman earnings disappoint on the back of litigation funds. Goldman Sachs Group today reported a significant drop in earnings for second-quarter 2015, largely because of provisions for litigation that shaved $2.77 per share from results to leave the realized earnings at $1.98. Excluding legal costs, earnings beat analyst expectations significantly as the firm’s trading groups fared better than expected. The investment bank set aside the funds in advance of a settlement with the Department of Justice relating to mortgage-backed securities, making it the latest major Wall Street firm to do so.
New accounts continue at record pace in China. There are signals that government rescue efforts for Chinese markets may be inspiring confidence among retail investors in China, despite the dramatic sell-off on recent weeks. According to a report issued today by Jefferies quantitative analysis group in Hong Kong, New account openings reached 12.8 million in June versus 11.9 million in May leading the total number of accounts that can trade equities in the nation to rise by 10 percent month-over-month.
EU antitrust regulators set sights on Qualcomm. On Thursday the European Commission, the European Union’s primary competition watchdog, announced two separate investigations into the San Diego–headquartered chip manufacturing company Qualcomm’s pricing and sales tactics. EU antitrust head Margrethe Vestager has come under criticism for specifically focusing on large U.S. internet technology firms, with some analysts opining that the investigations may be politically motivated.
eBay to sell unit. The Wall Street Journal reported today that eBay is near an agreement to sell its eBay Enterprise unit, which powers online selling for outside retailers, to a consortium of firms led by private equity manager Permira for approximately $900 million. Same sources cited indicated that the spin-off of payment unit PayPal will be completed Friday.
Portfolio Perspective: Markets Try to Time a Rate Hike — Karl Haeling, Landesbank Baden-Württemberg
Fed head Yellen’s ongoing emphasis that the likely slow pace of tightening is more important than the timing of the first rate hike has seemed to help flatten the yield curve. It may also be somewhat noteworthy that Yellen stressed she saw no need to forewarn the market before the Fed actually announces a rate increase.
It was also significant that Yellen noted the economy could actually benefit from higher rates, an indication that she probably prefers at least one rate increase this year. The timing of the first rate hike probably depends on Fed priorities. Will the Fed see a need to raise by September or October given year-end considerations that it may have difficulty raising rates in December? Or will the desire for economic, financial and inflation indicators to all be pointing in the right direction be most important? Yellen has provided almost no insight on the timing question beyond saying one seems probable at some point this year.
A complicating factor could involve inflation. While producer price index figures jumped higher in June, recent weakness commodities suggests any uptick in inflation will be short-lived. The behavior of the commodity markets going forward will be increasingly critical.
Karl Haeling is a vice president of capital markets at Landesbank Baden-Württemberg’s New York office.