Deadlines, Deals, and Defaults

Greece has defaulted on its loan to the IMF, but hopes of a last-minute deal remain alive. And it is these hopes and rumors of a potential deal that appear to be giving markets a lift today.

It isn’t easy to fully decipher the evolving Greece situation and how markets should or shouldn’t respond it. But the spotlight on Greece has pushed every other issue into the background.

Just as today was the deadline for Greece to reach a new bailout deal, it's also the deadline in the long-running Iran nuclear negotiations that are aimed at restricting that country’s nuclear weapons program in return for normal relations and the lifting of sanctions. The Iran negotiations have been even tougher than what took place with Greece, but hopes remain alive that a deal could be achieved, though negotiations are expected to continue into the weekend.

If a deal is reached in the next few days, then Congress will have 30 days to vote on it before it gets finalized. It is this increased odds of an Iran deal that has kept the crude oil market in a super-narrow $58 to $62 per barrel range over the last few months. Given how oversupplied the global crude oil market is at present, a deal and the associated lifting of sanctions on Iran will almost guarantee that oil prices will break below the lower bound of that range and may be even go below $50. It is this oil price outlook that has kept stocks of oil producers like Chevron (CVX) and ConocoPhillips (COP) under pressure lately.

The Fed’s primary preoccupation in deciding the course of monetary policy is undoubtedly the health of the U.S. economy, and it will be trying gauge that from incoming data. We have a busy docket of top-tier reports on that front, with the June manufacturing ISM survey coming out tomorrow and the non-farm payroll report coming out on Thursday. The broadly improving tone of U.S. data lately has helped frame the market’s Fed expectations, with consensus expecting the Fed to come out with its first rate hike in September. But it will most likely be keeping an eye on the international economic backdrop as well, which can become unsettled because of the developing Greece situation.

Summer is typically a quiet period for the markets. But this summer is proving to be anything but quiet, thanks to this mix of Fed preoccupation and international hotspots.

Related podcast interview:
Update on Greece With Frances Coppola

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