Investors will have two big questions to answer in the coming week — are they chasing U.S. Treasury yields too low and can they put the Greek debt crisis on ice and move on?
A schedule of central bank meetings and an apparent agreement on a new bailout plan for Greece provide the backdrop. Clarity, however, may be hard to come by, particularly after Friday's terrible U.S. jobs report.
The two issues are not unlinked. The Greek crisis pummeled demand for the euro during a good part of May, helping push investors into dollar assets, including 10-year Treasurys.
Yields on the latter
Some investors — most notably the big bond fund Pimco — think this is insane given the poor state of U.S. finances.
It is also happening as the U.S. Federal Reserve prepares to end its asset-buying quantitative easing (QE) program, meaning a big buyer is soon going to leave the building.
Part of the drive into Treasurys, however, comes from the poor showing by the U.S. economy and a worry that the global economy is in at best a soft spot, at worst ready to tip into decline again.
Following Friday's employment report — which will dominate trading in the early part of the week — there could well be renewed expectations among investors of a third round of quantitative easing from the Fed.
Independent investment advisers Lombard Street Research reckon such a move would pose problems for the U.S. central bank given domestic political opposition and the fact that $1.4 trillion in QE has already been spent.
"A QE3 episode seems pretty unlikely," said Gabriel Stein, Lombard's senior international economist. "But the question is, what should the Fed do instead?"
The euro has strengthened and the dollar weakened in recent days as policymakers have inched towards a new bailout for Greece along with a new austerity program from Athens.
In effect, this has allowed the currencies to begin trading again in line with interest rate differentials, that is, in favor of the higher-yielding euro.
What will be at issue in the coming week is whether expectations for tighter euro zone policy hold up and whether markets are finally satisfied that Greece is not about to default or restructure its debt.
"What you get is some relief that the immediate risk of missed repayments has been delayed. But what we are talking about is two-year (Greek) yields coming down to 23 percent from 26 percent," said Marc Ostwald, bond strategist at Monument Securities.
"It is still another exercise in kicking the can into the future ... if more firmly."
The European Central Bank meets on Thursday to discuss interest rates. A rise is generally expected at the July meeting, but the challenge facing the ECB is complicated by the debt crisis and the extent to which some banks in Greece, Portugal and Ireland are still shut out of the interbank market.
Given that, investors will be clearly listening for any sign that a July hike is open to revision.
The Bank of Portugal offers up a financial stability report on Tuesday.
All this — poor U.S. data, euro zone debt troubles, the future of QE — has put equity investors on something of a backfoot, eating into the year's gains.
Reuters asset allocation polls, released in the past week, showed investors taking very bearish positions, cutting back on equities in favor of cash and bonds.
This kind of positioning, however, can be a counter indicator, pointing to a pending rise.
Japanese investment bank Nomura detected some signs of that in a report issued on Friday.
Fund investors globally returned with a moderate net inflow of $1.8 billion in equities for the week of May 26-June 1, it said, recovering some 13 percent of the outflows recorded during the previous two weeks.
But it noted the return of inflows was "far from broad-based" as a few regions still record net outflows.
In other words, investors have started the new month in a cautious mood, looking for answers.
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