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Greek crisis at a fever pitch

Weekly market commentary
Courtesy of Ken Armstrong, Shane Fleury and Steve Shanley of The Northwestern Mutual Wealth Management Company — Vail Valley

With the clock ticking and the insults flying, the Greek crisis reached a fever pitch last week. As has been the case since February, nothing concrete was done to head off the nation’s impending default and possible eurozone exit.

By the end of this month, Greece’s bailout comes to an end and it will lose the chance (barring an extension) to get the last €7.2 billion it so desperately needs. At the same time, Greece will have to make a bundled payment of €1.6 billion to the International Monetary Fund (IMF) — money it doesn’t have. This past week, both sides continued to negotiate — and to snipe at each other — while opinions about the impact of a “Grexit” varied. Some in the European Union are beginning to see it as a viable, if unwanted, option. That’s because the EU’s private banks are not as exposed as they were if a default had happened three years ago since most of the debt is now held by institutions like the IMF or central banks. In addition, there’s the feeling that members should adhere to the eurozone’s rules or other nations might follow Greece’s wayward path. In any case, Europe’s stock markets were surprisingly stable last week even as the drama intensified.

Still, tempers were further frayed when Greece’s central bank said the drama could “snowball into an uncontrollable crisis, with great risks for the banking system and financial stability.” Then the EU caused tremors by suggesting that Greece’s banks might not open today, while Prime Minister Alex Tsipras seemed to intentionally irk the EU by meeting with Russia’s Vladimir Putin to discuss “safe harbors.” On the plus side, the European Central Bank said it would continue to lend money to Greece’s beleaguered banks, and this week’s high-level meeting has been moved from June 25 to June 22. Donald Tusk, president of the European Council, summed up the next steps, saying, “The game of chicken needs to end, and so does the blame game.” The Greek government early Monday submitted a new proposal that an EU spokesman called a “good basis for progress.”



Sure but slow

In any other week, the lead story would be the Federal Reserve’s policy meeting, but this week it was pushed to page two by the Greeks. However, investors were tuned in. The Fed’s continued commitment to raise its benchmark rate later this year, but at a snail’s pace, drove stocks up — the Nasdaq hit a new high on June 18 – and brought Treasury yields down. The 10-year Treasury climbed to an intraday high of 2.5 percent two weeks ago, but fell from 2.35 percent to 2.27 percent on Friday. In her post-meeting press conference, Fed Chairwoman Janet Yellen said of a first hike in 2015, “It’s not an ironclad guarantee, but we anticipate that that’s something that will be appropriate later this year.” Regarding the pace of rate hikes, she added, “I want to emphasize sometimes too much attention is placed on the timing of the first increase. What should matter to market participants is the entire trajectory of expected policy.” Members of the Federal Open Market Committee said they expect the rate to reach 1.75 percent by the end of 2016, noting that a year ago, they saw it hitting 2.5 percent.

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Not dead yet

Two weeks ago, the Democrats in the House overturned a workers’ aid program that was seen as a death knell for President Obama’s Pacific Trade Pact, but last week the bill rose from the dead thanks to an unlikely alliance between the president and the House Majority Leader John Boehner (R, Ohio). The bill was passed by the House, but its continued survival will depend on the inclusion of the worker protection guarantees that the House’s democrats recently overturned.

Sanctions extended

The EU moved to extend by six months the sanctions against Russia due to expire at the end of July. Russia has been lobbying a number of member nations, including Greece, because the vote has to be unanimous. The decision is expected to be ratified this week.

Consolidation continues

The president’s Affordable Care Act, the constitutionality of which will soon be addressed by the Supreme Court, has spurred consolidation in the health insurance industry. The reason for this is that it has resulted in higher revenues but reduced profits, and last week Anthem made a $47 billion takeover bid to acquire its rival Cigna, which Cigna has rebuffed.

Building permits hit eight-year high

The Commerce Department reported that building permits soared 11.8 percent in May from the month before to 1.28 million, the highest total since August 2007. However, housing starts were off 11.1 percent after a banner month in April when they were up 22.1 percent. In other economic news, the Fed said that manufacturing fell 0.2 percent in May, partly because of scaled-back oil production, not to mention the stronger dollar. Overall, industrial production was down the same 0.2 percent. The ISM Manufacturing Index rose in May for the first time in six months, up to 52.8 from 51.5. The National Association of Home Builders-Wells Fargo Housing Market Index of builder sentiment increased to 59 in May from 54, and the outlook for the next six months was up sharply. Due to the rebound of gas prices — up 10.4 percent, the biggest jump since June 2009 — the Consumer Price Index rose 0.4 percent in May. This was its fastest pace since February 2013, as it was flat over the last 12 months. Core inflation, less food and gas, was only up 0.1 percent, but increased 1.7 percent year-over-year compared to 1.8 percent in April.

A look ahead

With the Fed’s meeting behind us, Greece will have the headlines to itself this week as its reps hold down-to-the wire meetings with creditors. In addition, there will be updates on existing and new home sales, durable and capital goods orders, manufacturing and services, personal income and consumption, and consumer confidence, as well as the government’s third estimate of first-quarter, expected to improve from -0.7 percent but to still remain in the red.

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This commentary was prepared specifically for your wealth management advisor by Northwestern Mutual Wealth Management Company®.

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