Markets seem to be taking a sigh of relief from the Greece deal and further signs of stability in the Chinese market. This should help us move past these issues and pay more attention to domestic fundamental matters like the Q2 earnings season which ramps up later week.
Greece finally got a new bailout in return for much tougher and stringent reforms that will keep it within the currency union. This should help the markets look past the Greece issue… for now. As welcome as today’s headlines are, the problem is far from resolved. The Greek parliament has to pass new laws later this week that will restructure the country’s pension laws and impose new taxes, measures that the Greek voters rejected overwhelmingly in the last referendum. This vote in the Greek parliament has the potential of splitting the country’s governing party, which could push the country back into elections and all the uncertainty associated with elections.
Beyond this immediate issue is the problem of Greece’s debt, which everybody agrees is unpayable, but which the creditors don’t want to write down. There is some vague reference to restructuring the country’s debt in today’s deal, but Germany remains opposed to writing down the face value of Greece’s debt. Germany fears that doing so would set a bad precedent for other heavily indebted Euro-Zone members like Italy, Spain and Portugal. That may be so, but it still leaves the Greece problem unresolved… to be dealt with at a later stage. In other words, today’s deal is just another one of those kicking-the-can-down-the-road type of arrangements.
This Greece ‘resolution’ will hopefully put the spotlight back on domestic fundamental factors like Q2 earnings season that gets into high gear this week with J.P. Morgan (JPM) and Wells Fargo (WFC) kicking off the big bank earnings Tuesday morning. Overall Finance sector earnings are expected to be only modestly up from the same period last year (up +2.7%), with continued net interest margins pressures keeping top-line gains in check and cost cuts effectively the only means for bottom-line growth.
That said, there has been some improvement in underlying loan demand, particularly for commercial and industrial loans, and housing remains a bright spot. Investment banking has been looking up as well, with momentum on the advisory side of the business more than making up for continued weakness on the trading side.
Related podcast interview:
Kim Wallace: Greece Unlikely to Exit – There Is No Alternative to Europe
