What’s the effect of Greek debt on world markets?

Policymakers were front and center in last week’s news flow, with negotiations continuing in Europe over the debt crisis in Greece, and the June Federal Open Market Committee (FOMC) meeting discussing when interest rate policy might change in the United States.

Greece remains an issue for global markets, although volatility remains modest for major economies such as the United States, Japan, and Germany. Negotiations continue as the deadlines loom for debt repayments in Greece, and outflows continue to plague Greek banks. Ultimately, European policymakers must decide what price they are willing to pay to keep Greece within the eurozone. We believe that, eventually, a deal with Greece will be reached, but market volatility may be a prerequisite to get to a deal. Greece is relatively minor in terms of global economic influence, so economic impact from the turmoil should be limited. On the small chance of a disorderly exit by Greece from the eurozone, market volatility would likely rise in the short run. As the crisis abates, we believe the major economies will remain relatively healthy, leading to the potential for improving market returns.

The June FOMC meeting concluded with no change to Federal Reserve (Fed) policy and the renewal of the Fed mantra to be data dependent in its decisions. We still believe September will be the meeting for the Fed to shift away from its zero interest rate policy. U.S. economic data last week was somewhat softer, with industrial production falling for the past five months in a row and core inflation pressures easing. In our view, data should improve modestly in coming months helped by the stronger job market. This continues to be evidenced by weekly jobless claims data, which have remained below 300,000 claims for 15 weeks in a row.

For more information, please go to: https://reserve.usbank.com/insights/market-economic-update.

Robert L. Haworth, CFA, is a senior investment strategist and Darrell Behnke is the Madison market leader for the Private Client Reserve of U.S. Bank.

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