Good Morning

And so the wheel turns and it is GREECE that is back in the news -Greek voters had the choice yesterday to accept austerity and reject the previous leader who led their country closer than ever to being forced out of EU/EUR. Instead, they embraced him and voted him back into power, albeit on a smaller majority.

PM Tsipras and his party SYRIZA, emerged from a second election in eight months (5th in 6 years) with a level of support barely diminished from the emphatic victory that catapulted him into power and a standoff with the euro region. SYRIZA, took 35.5% of the vote compared with 28.1% for the centre-right New Democracy, will enter a coalition with the same small party that helped it rule before. After coming to power pledging to end austerity and restore “dignity,” Tsipras now must implement the further sharp spending cuts and tax increases he ended up agreeing to in exchange for €86bn of fresh European aid. The electorate has voted to return to power a party that “ditched its promises, switched its policies, and caused the collapse of Greek banks, bringing in an unneeded recession,” said Stathis Kalyvas, a professor of political science at Yale University. On the other hand, “this government will be called to implement a stringent set of fiscal and structural reforms that it vigorously rejected before,” he said. During the Summer of discontent, Banks were closed, commerce ground to a halt, and European officials began to talk openly of Greece exiting the EUR. The crisis was only resolved when Tsipras caved in to creditor demands, agreeing to a package of requirements arguably even more onerous than the one Greek voters rejected in a referendum less than two weeks earlier. Tsipras’s power over matters of taxation, spending, and regulation will be minimal given that all key economic decisions have effectively been made by European finance ministers and central bankers, and any deviation risks a halt to aid payments. “The space for brinkmanship or renegotiating the agreement is close to zero,” said Brunello Rosa, an analyst at Roubini Global Economics. An initial review by creditors of the country’s progress in implementing the program is due before the end of the year, with another in spring 2016. I think considering what we witnessed since February, Tsipras has grown both as a leader and politician understanding what it takes to rule a country that is so divided. This time however I think Tsipras and his Syriza party understand that austerity is simply unavoidable and changes have to be made. Greece (like Scotland) cannot afford to go it alone. Time will tell!!!

I owe you an apology – I wrote last week the FED will definitely raise rates – I was wrong. Despite the strong economic data supporting a hike, the FED could simply NOT IGNORE the global crisis that is upon us. A strong China means more to the US that the prospect of higher interest rates. December is the next possible date, but unless China makes a remarkable turnaround, the chances are we will now only see a US rate hike in Q1 2016. Bear in mind authorities in the UK have also been calling for rate hikes, but one thing is for certain the UK would never jump the gun and hike first (never say never) – but I think you get what I am saying. So any UK rate hike has indeed been pushed out at the same time. Interesting to read over the weekend some calling for a CUT in rates and negative interest rates. I think that is a little too much as the UK economy is doing just fine.

Last Friday Moody’s (rating agency) downgraded France’s government bond ratings by one notch to Aa2 from Aa1. The outlook on the ratings is stable. The key interrelated drivers of today’s action are: 1. The continuing weakness in France’s medium-term growth outlook, which Moody’s expects will extend through the remainder of this decade; and 2. The challenges that low growth, coupled with institutional and political constraints, poses for the material reduction in the government’s high debt burden over the remainder of this decade. Quite unexpected if I am honest, but not surprising. EURUSD has not really reacted adversely to this news and the FX market has taken it on the chin.

In the aftermath of this week’s FOMC, for this week there are 9 CB meetings: South Africa, Turkey, Israel, Czech Republic, Hungary, Philippines, Taiwan, Mexico and Colombia. Not expecting too many fireworks from any of these meetings.

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