In light of recent market volatility, it is important for investors to remember that while emerging markets may have a tough road ahead, the underlying economic picture in the developed world has proven resilient. The G3 economies, Europe (the 28 European Union countries), the U.S., and Japan account for approximately 52% of global GDP, and as such are major drivers of global demand. Unemployment rates in these economies have continued to decline gradually and the improvement in economic growth across the developed world should support further job creation, improving consumer confidence, and stronger consumption. These are all positive developments for corporations, as falling unemployment is indicative of an expanding business sector. As such, it is important for investors to look through the volatility of the past few weeks, and instead focus on thoughtful asset allocation which tilts them toward those areas which have proven relatively insulated from the contraction in emerging markets.
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Investors hoping that their portfolios will be able to pay for retirement are about to be sorely disappointed, according to legendary bond king Bill Gross.
Recent market volatility, including wild gyrations on the Dow Jones Industrial Average and S&P 500 as China’s economy slows, point to a fundamental problem in the global economy, Gross, who cofounded Pimco and is now lead portfolio manager at Janus Capital Group , said in his monthly investment outlook.
Changing course will be a time-consuming endeavor, he says: It requires China, the world’s second-largest economy, to shift more quickly to a consumer-based system and necessitates the developed world abandoning its “destructive emphasis on fiscal austerity.” In the interim, investors are likely to receive lackluster returns, which makes paying for college educations and funding a comfortable requirement more difficult.
The timing and size of the Federal Reserve’s interest-rate increase, which may occur as early as this month, will play a role, too. Interest rates have been held to nearly zero since the financial crisis of 2008, and while Gross has long advocated starting to raise them, such a move “now seems to be destined to be labeled ‘too little, too late,'” he said.
Low rates hurt savers because interest on deposits is limited or nonexistent. And with fewer incentives to save, Gross argues there are fewer incentives to invest, which could hurt long-term productivity.
“Finance based capitalism with its zero-bound interest rates has now produced global imbalances that impair productive growth and with it the chances for ‘old normal” prosperity,’ Gross says.
“Major global policy shifts — all in the same direction — are required that emphasize government spending as opposed to austerity” and attempt to address the issue of “too little aggregate demand,” Gross says, echoing the philosophies of 20th-century economist John Maynard Keynes as well as economist and New York Times columnist Paul Krugman.
Such recommendations, he concedes, are “politically Pollyannaish.” The policies of Angela Merkel, the German chancellor who has championed austerity in the European Union, are unlikely to be abandoned anytime soon, Gross says, “nor will Bernie Sanders be elected U.S. president.”
Sanders, the Vermont senator seeking the Democratic nomination for 2016 elections, has advocated $1 trillion in infrastructure investments over five years and argued that the U.S. is sliding into “economic oligarchy.”
Currently, almost 50% of U.S. tax dollars go to entitlement programs such as Social Security and Medicare, and only 7% goes to transportation, education, and medical research, according to data collected by the Center on Budget and Policy Priorities.
“Global fiscal (and monetary) policy is not now constructive nor growth enhancing, nor is it likely to be,” Gross says. If that be the case, then equity market capital gains and future returns are likely to be limited if not downward sloping.”
What’s an investor to do? Hold cash or “near cash” investments such as one- to two-year corporate bonds, despite their likely uninspiring returns, Gross says.
The mindset he proposes is one that actor and comedian Will Rogers voiced during the Great Depression of the 1930s: “I’m not so much concerned about the return on my money as the return of my money.”
In the long run, though, “the return of your money will likely not pay for college, health care or retirement liabilities,” Gross says. “Whether you are tall or short, or your portfolio big or small — better to be big — they’re not going up as much as you hope they would over the foreseeable future.”
BRUSSELS—Eurozone leaders said Monday morning that they would give Greece up to €86 billion ($96 billion) in fresh bailout loans as long as the government of Prime Minister Alexis Tsipras manages to implement a round of punishing austerity measures in the coming days.
The rescue deal—hammered out after 22 hours of, at times acrimonious, negotiations between the currency union’s leaders and finance ministers—requires the Greek left-wing government’s near-total surrender to its creditors’ demands.
But it gives the country at least a fighting chance to hold on to the euro as its currency.
“The deal is hard,” Mr. Tsipras said after the summit, warning that the measures required by creditors will send the country’s economy further into recession.
European stocks rallied early Monday on the news. By mid-morning, the Stoxx Europe 600 was up 1.5%, building on Friday’s hefty gains. Germany’s DAX rose 1.4%, France’s CAC-40 added 1.9% and London’s FTSE 100 rose 0.6%. In southern Europe, Italy’s FTSE MIB climbed 1.2% and Spain’s IBEX gained 1.5%.
By Wednesday, Athens’s Parliament has to pass pension overhauls and sales tax increases that voters overwhelmingly rejected in a referendum just one week ago. Greece now has to implement European Union rules that make it easier to wind down broken banks, including by sharing the cost with investors and creditors.
“Trust needs to be restored,” German Chancellor Angela Merkel said at a news conference.
“The agreement was laborious. It took time but it was done,” said Jean-Claude Juncker, the president of the European Commission.
“There won’t be a Grexit,” Mr. Juncker added, referring to a Greek exit from the eurozone.
In a concession to Greece, eurozone governments will consider measures to make the country’s debt more manageable, for instance by giving it more time to repay rescue loans.
A detailed rescue program that will have to be negotiated after the first overhauls and cuts have been implemented will contain measures that go far beyond the kind of oversight and external control other governments under eurozone bailouts have endured.
The most divisive step demanded by Greece’s creditors is the creation of a fund that would hold some €50 billion in state-owned assets slated to be privatized or wound down in the coming years. The fund will be under European supervision, Ms. Merkel said.
Most of the money raised will go to pay off Greece’s debt and help recapitalize its broken banks, while €12.5 billion can be used for investment, said Ms. Merkel.
“The advantages outweigh the disadvantages,” she said about the deal, while warning that Greece’s path back to growth will be long and arduous.
Despite these big concessions by Mr. Tsipras, Greece’s future in Europe’s currency union still hangs in the balance.
Passing the tough new bailout measures through Greece’s Parliament could split Syriza and its right-wing coalition partner, the Independent Greeks, which in turn could trigger fresh elections. And there wasn’t an answer on when the country’s banks—closed for most business for the past two weeks—will reopen or how Greece will make a €4.2 billion payment to the European Central Bank on July 20.
The eurozone’s finance ministers will discuss how to come up with a mechanism to meet Greece’s short-term financial needs “as a matter of urgency,” Donald Tusk, the president of the European Council who led the talks, said after the summit.
A statement issued after the summit says Greece will need between €82 billion and €86 billion in fresh funding over the next three years. Between €10 billion and €25 billion will be required to recapitalize Greek banks, damaged by months of deposit outflows and two weeks of capital controls.
French President François Hollande, whose government lobbied hard for Greece in recent weeks, said he expects the ECB to step in with additional liquidity for Greek lenders, as long as Athens follows through on a deal. That could allow banks to gradually reopen.
“That was the indispensable condition, but it will take a few days,” Mr. Hollande said.
In a concession to Greece, eurozone governments will discuss ways to make the country’s debt load more manageable later this year.
“There will be a reprofiling of the debt by extending maturities and doubtless a negotiation on the interest rates,” said Mr. Hollande. “That is part of the agreement.” Ms. Merkel stressed that there won’t be a cut to the nominal value of rescue loans.
European officials said negotiations came close to collapse at some points during the night, when Mr. Tsipras argued that some of the creditors’ demands would be impossible to meet. Germany in particular has been driving a hard line, which for much of the evening included the possibility of a “time-out” for Greece from the currency union.
“In Germany there was strong opinion for Grexit,” Mr. Hollande said, “and not just in Germany.”
“I refused this solution,” he added.
As part of the deal, Greece’s administration will be modernized and depoliticized, Ms. Merkel said, adding that the Athens government will be expected to make first proposals by July 20.
The measures laid out in Monday’s statement reach deep into the workings of Greece’s economy. They include changes to labor laws that would make it easier to fire workers, as well as the further liberalization of markets for products such as pharmaceuticals, milk and baked goods, the statement said. Greece also would have to privatize state assets, including the electricity network operator.
Contrary to Greece’s wishes, the International Monetary Fund will remain involved in bailing it out even after the fund’s existing rescue program expires in March. Athens defaulted on a €1.56 payment to the IMF on June 30 and is unlikely to make a €456 million payment due Monday. The summit statement said it was important for the government to cover the failed payments.
“It has been a laborious night, but I think it is a good step to rebuild confidence,” said IMF Managing Director Christine Lagarde.
Written by Gabriele Steinhauser, Viktoria Dendrinou, Matthew Dalton of The Wall Street Journal
In an eleventh-hour attempt at making fast-approaching debt repayments and avoiding a disastrous exit from the eurozone, the Greek government has formally filed a request for support from Europe’s bailout fund. The one-page letter outlining the request, leaked to the media Wednesday, gives a broad overview of the bailout’s proposed terms and the economic reforms Greece promises to make.
Without going into specifics, the letter states Greece would immediately overhaul parts of its tax and pension systems, with changes coming down “as early as the beginning of next week.” Greece’s creditors at the European Central Bank have made tax and pension reforms paramount to extending its support program to Greece, which recently missed a scheduled 1.5 billion euro ($1.7 billion) payment to the International Monetary Fund.
According to the request, the Greek government would seek a three-year lending facility, an increase from last month’s two-year request. The Greek government owes 3.5 billion euros ($3.8 billion) to the ECB on July 20, a payment that the government currently cannot make. Numerous European officials have made the unprecedented assertion that failure to secure an agreement in the coming week will likely mean a Greek exit, or Grexit, from the eurozone.
Although this request formally opens talks with the European Stability Mechanism, the eurozone’s 500 billion euro bailout fund, Greece’s full proposal will be outlined in coming weeks.
Greece’s left-wing Syriza government has steadfastly demanded its creditors offer debt relief, a measure supported by the IMF. Despite initial proclamations its negotiators wouldn’t budge in resisting further austerity measures, however, the Greek government has offered concessions to some of its creditors’ budget and spending demands.
The letter hints at Greece’s continued insistence on debt relief: “Greece welcomes an opportunity to explore potential measures to be taken so that its official sector related debt becomes both sustainable and viable over the long term.”
Eurozone finance ministers are expected to discuss the request Wednesday via teleconference.
Written by Owen Davis of International Business Times
Trading on the New York Stock Exchange in late-morning trade on Wednesday with U.S. stocks extending their losses as continued concerns about Greece and the extended selloff in the Chinese market pressured investor sentiment.
“We’ve had some technical malfunctions. Some may be related to connectivity with other exchanges. I believe we’re going to have a temporary pause certainly in a variety of stocks perhaps floor wide,” Art Cashin, director of floor operations at the NYSE, told CNBC, adding that the halt will not cause a move in a particular direction.
Other exchanges, however, continued trading normally. The NYSE later said that all open orders amid the halt will be cancelled.
“What happens with these situations is often you get a sort of residual result. You’re all clear or you get caught up to date and there’s a little bit of a backlog that pops up somewhere, and it tends to jam things up. So I don’t think any of us has quite enough information yet,” Cashin added.
The Dow Jones industrial average traded about 175 points lower when trading was halted as the major averages declined, with the Nasdaq Composite briefly off more than 1 percent as biotechs and Apple (AAPL) plunged more than 1 percent. The iPhone maker was also the worst performing stock in the Dow.
The S&P 500 struggled to hold gains for the year. The index dipped into negative territory Tuesday but recovered in afternoon trade to hold slightly higher for 2015.
“I think we’re just realigning the U.S. market with the declines elsewhere,” said Peter Boockvar, chief market analyst at The Lindsey Group.
In China, the Shanghai Composite closed nearly 6 percent lower despite supportive government measures. The index has fallen more than 30 percent from its mid-June peak amid frequent bouts of extreme volatility. Analysts say the turbulence is starting to unnerve regional investors.
“There was no real trigger until Chinese stocks became too pricey,” said Nick Raich, CEO of The Earnings Scout. “The trigger that sent this all off has been the Greece debt crisis.”
European stocks traded higher on Thursday amid hopes of a Greece deal. However, the indices are more than 2 percent lower for the week so far.
The Greek government has until Friday morning to present detailed reform proposals to allow a bailout deal by a Sunday summit.
Greek Prime Minister Alexis Tsipras addressed the European Parliament on Wednesday, lambasting Europe’s advocacy of austerity and the efficacy of Greece’s bailout programs since 2010, but promised a detailed, “concrete” deal would be presented in the next two to three days.
“Unfortunately the U.S. will remain headline-driven until earnings season which (starts) with Alcoa tonight,” Boockvar said. “Today will clearly be bullied around by headlines out of Greece.”
The Federal Open Market Committee (FOMC) minutes at 2 p.m. ET will also be in focus, with traders scanning the Federal Reserve’s June meeting report for hints on interest rate rise timing.
“I think the Fed minutes are something to watch closely,” said Randy Frederick, managing director of trading and derivatives at Charles Schwab. But “usually the market doesn’t do much around the minutes until they’re released.”
The Dow Jones Industrial Average (.DJI) traded down 194 points, or 0.99 percent, at 17,583, with Intel leading decliners and Microsoft (MSFT) the only advancer.
The S&P 500 (.SPX) traded down 23 points, or 1.14 percent, at 2,057, with telecommunications leading all 10 sectors lower.
The Nasdaq (.IXIC) traded down 64 points, or 1.31 percent, at 4,931.
The CBOE Volatility Index (VIX) (.VIX), widely considered the best gauge of fear in the market, traded near 18.
About five stocks declined for every advancer on the New York Stock Exchange, with an exchange volume of 194 million and a composite volume of 1.22 billion as of 11:30 a.m.
Crude oil futures for August delivery lost 81 cents to $51.52 a barrel on the New York Mercantile Exchange. Gold futures rose $7.50 to $1,160.20 an ounce in morning trade.
Bond yields held lower, with the 10-year yield at 2.23 percent and the 2-year at 0.57 percent. The Treasury auctions $21 billion in 10-year notes this afternoon.
The U.S. dollar fell about half a percent against major world currencies as the euro gained to above $1.10.
Earnings season unofficially begins with aluminium producer Alcoa (AA) reporting after the market close.
Oil prices fell sharply on Monday after Greece rejected debt bailout terms and as China rolled out emergency measures to prevent a full-blown stock market crash, adding to worries about poor demand growth at a time of global oversupply.
The result of Greece’s referendum has put in doubt its membership in the euro, pulling down the single currency (EUR=) against the dollar.
A strong dollar tends to pressure commodities as it makes fuel more expensive for holders of other currencies.
Commodities were also sucked into market turmoil that has seen Chinese shares (.CSI300) fall as much as 30 percent since June due in part to an economy that is growing at its slowest pace in a generation.
Chinese brokerages and fund managers have agreed to buy massive amounts of stocks to support markets, helped by China’s state-backed margin finance company, which in turn would be aided by a direct line of liquidity from the central bank.
“Uncertainty over Greece is bearish for oil. It adds an extra negative factor on top of the turmoil in Chinese financial markets, the recent rise in U.S. drilling rigs, and a potential increase in Iranian oil supply,” said Olivier Jakob, senior energy analyst at Petromatrix in Zug, Switzerland.
“The main implication is for euro/dollar and I think it will put additional pressure on the euro,” he added.
Benchmark Brent crude oil (LCOc1) fell $1.42 a barrel to a low of $58.90 before recovering a little to around $59.00 by 0925 GMT. U.S. light crude (CLc1) fell as low as $54.34, down $2.59 from its close on July 2. July 3 was a U.S. holiday.
The falls left both crude benchmarks at their lowest since mid-April.
With markets already nervous due to the turmoil in Europe and China, fundamentals were also bearish.
U.S. drilling increased for the first time after 29 weeks of declines, the strongest sign yet that higher crude prices are coaxing producers back to the well pad.
Production in Russia and the Organization of the Petroleum Exporting Countries is also at or near records.
“Demand is good, but supply is better,” said Bjarne Schieldrop, chief commodities analyst at SEB in Oslo.
Putting further pressure on oil markets is a possible nuclear deal between global powers and Iran, which could add more oil to oversupplied markets if sanctions are eased.
“Reports increasingly suggest a deal is likely before July 9,” Morgan Stanley analysts said in a report.
After Sunday’s landslide “no” result in Greece, the survival of the country’s banks — closed for the past week and with a daily ATM withdrawal limit of €60 per customer — hangs in the balance as the European Central Bank considers its next move.
The ECB’s governing council was due to meet Monday in Frankfurt, Germany, to discuss whether to continue propping up the Mediterranean country’s struggling lenders after Greeks voted 61.3% to 38.7% to reject the terms of a European Union-led bailout to replace the one that expired on June 30.
With the prospect of a Greek exit from the eurozone now very real, that puts the already fragile banking system in even more of a capital crunch, observers warned.
“Bad blood, closed banks and no more bailout,” tweeted ING-DiBa Economist Carsten Brzeski, while Berenberg Bank Chief Economist Holger Schmieding blogged that the absence of an immediate bailout deal makes it “very hard” for the ECB to authorize continuing emergency support for Greek lenders.
The Greek banks most at risk are the country’s largest: National Bank of Greece, Piraeus Bank, Alpha Bank and Eurobank Ergasias. They account for more than 90% of Greek banking assets.
All four had their long- and short-term issuer default ratings, along with their viability ratings, downgraded last week by Fitch Ratings, which warned that they would have defaulted had capital controls not been imposed at the start of the week.
However, shares in the banks rose sharply on Monday, with Alpha Bank closing up almost 13%.
As for how to plug the capital holes, Credit Suisse Group analysts Neville Hill and William Porter suggested three possible courses in a Monday research note: bankruptcy; a recapitalization from the European stability mechanism that would put Greek banks under EU ownership; or, in the case of a ‘Grexit,’ or Greek exit from the eurozone, capitalization by the Bank of Greece. The latter would entail converting all euro contracts into a new currency, meaning that a Greek banking system as such would cease to exist.
For now, the ECB is staying mum on whether to lift its €88.6 billion ($97.7 billion) ceiling on emergency liquidity assistance for Greek lenders, two weeks before another crucial deadline when Greece has to repay €3.5 billion to the ECB.
“Regarding Greece, we currently have no communication planned for today,” an ECB representative said.
Besides the ECB meeting, Sunday’s referendum outcome left politicians scrambling to prevent a major Greek financial meltdown and unprecedented eurozone exit.
EU Council President Donald Tusk spoke by phone earlier in the day with ECB President Mario Draghi and Eurogroup chief Jeroen Djisselbloem, while German Chancellor Angela Merkel and French President François Hollande are due to compare notes over dinner in Paris. Euro-area finance ministers will gather in Brussels on Tuesday afternoon, followed by an evening summit of EU leaders likely to drag on for most of the night.
In a short statement Monday, Djisselbloem called the referendum outcome “very regrettable for the future of Greece,” warning that difficult measures and reforms are inevitable for the economy to recover.
As politicians and monetary policy makers try to figure out what happens next and await a revised bailout proposal from Greek Prime Minister Alexis Tsipras, observers weighed in on the consequences of a Grexit.
“A Greek exit from the common currency would be a financial, economic, social and potentially also political catastrophe for Greece, aggravated by the chaotic way a new currency would have to be introduced,” analysts at the Brussels-based European Policy Centre wrote on Monday.
They added: “Greece would be cut off from international financial markets, with disastrous repercussions for Greek banks and companies, while capital flight and emigration would become endemic … The political system might well be undermined, with potential dire consequences for stability and democracy in Greece, which is already under strain because of the deep split in society.”