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Weekly Market Update – July 2, 2015

The markets stumbled out of the gates this week as the seemingly never-ending Greek crisis continued.  To everyone’s surprise, Greece’s Prime Minister Alexis Tsipras announced that there would be a referendum on Saturday July 5th to vote whether Greece should accept the terms of its international creditors.  With the International Monetary Fund payment due on Tuesday, it was clear that Greece was going to miss its payment, sending the Dow and S&P 500 down on Monday by 1.95% and 2.09%, respectively.  Though both indices were down slightly on Thursday, markets recovered mid-week such that the Dow and S&P 500 finished the week down only .90%, and 1.21%, respectively.

All eyes are on Saturday’s referendum, as Greece’s Syriza political party continues to lobby for its citizens to vote no and reject the agreement of maintaining the current debt structure imposed by its international creditors.  Meanwhile, European Central Bank and European Union participants strongly implied that a no vote for the referendum would trigger a Greek exit from the European Union, the abandonment of the Euro currency, and a return to the Greek Drachma.   The international creditors are hoping that these significant consequences will deter Greece’s citizens from voting no.  

One might be wondering, “if the consequences of leaving the European Union and Euro are so severe, how could Greece’s citizens even consider voting no?”  Tsipras and the Syriza party believe that Greece’s exit from the Euro would be just as devastating for the European Union as it would be for Greece.  A Greek exit from the European Union would create a moral hazard type situation and signal to other European Union members that countries can simply leave the European Union if its costs are outweighing its benefits.  That would set a terrible precedent which explains why Tsipras and his party believe they have some leverage in negotiations. Their end goal is to achieve a restructuring of debts to make its debt service payments more serviceable and sustainable while ultimately staying within the European Union and keeping the Euro currency.  They are resisting reforms that would help bring Greek government spending in line with revenues.

This game of economic chicken is hampering the global economic recovery.  If there is some bright spot to this unfortunate scenario, it’s that the Fed will be even more reluctant to raise interest rates.  This reluctance to raise interest rates will benefit the trust preferred and traditional preferred securities in client portfolios.

In addition to referendum results next week and the Greek debt debacle, important economic data next week include the trade balance report on Tuesday, the Federal Open Market Committee minutes on Wednesday, and Initial and Continuing Jobless Claims on Thursday.

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