Morning Report - Endgame for Greece

Vital Statistics:

	Last	Change	Percent
S&P Futures	2112.5	-2.2	-0.10%
Eurostoxx Index	3469.3	18.9	0.55%
Oil (WTI)	59.35	-1.1	-1.82%
LIBOR	0.286	-0.001	-0.19%
US Dollar Index (DXY)	94.34	0.312	0.33%
10 Year Govt Bond Yield	2.29%	-0.05%
Current Coupon Ginnie Mae TBA	101.2	0.1
Current Coupon Fannie Mae TBA	100.1	0.2
BankRate 30 Year Fixed Rate Mortgage	4.04

Markets are lower after the ECB increased the size of its emergency liquidity program to Greece. Bonds and MBS are up.

No economic data today

We are getting to crunch time with Greece. Euro-area leaders are meeting Monday to try and hammer out some sort of gameplan. The ECB's emergency liquidity package expires on June 30, which is also the day a big payment is due to the IMF. It is looking more and more likely that Greece is going to exit the Euro. While most Greek debt is owned by the Greek banking system, some is owned by the big European banks as well. Some could see a hit to their capital. This will probably be dollar (and Treasury) bullish. 

Chinese stocks have been selling off, and have entered correction territory (defined as down 10%). The Chinese stock market has been in bubble territory for a while, and it looks like it is finally bursting. This market is being fueled by a toxic cocktail of margin debt and dumb money. Current margin debt is $368 billion. The market increased over 150% in one year (or about $6 trillion). While the index was higher in 2009, the Shanghai Composite P/E is currently about 95x earnings, versus 68x at the height of the 2009 market.

The bursting of the Chinese stock and real estate bubbles is going to complicate the Fed's job of trying to normalize interest rates by causing a flight to quality in US Treasuries. The biggest headache for the Fed will be when China begins to export deflation. Inflation is still too low as far as the Fed is concerned. The biggest fear? Interest rates are already at the zero bound throughout the world, and central banks are largely out of ammunition.