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 The International Monetary Fund dramatically raised the stakes in
Greece's stalled debt talks late on Thursday, announcing its
delegation had left negotiations in Brussels and flown home because
of "major differences" with Athens.
European and Greek politicians tried to overcome the setback, saying
on Friday that talks would continue in a bid to reach a deal by June
18, but for traders it was still a dent to growing optimism for an
agreement.
There was little sign of panic however. MSCI's all-world country
index was up 0.85 percent for what looked likely to be its best week
since late April.
The pan-European FTSEurofirst 300 index fell a modest 0.25
percent and though the euro tumbled for a second day to $1.1233, it
was still up 1 percent for the week.
"We are getting close and close to D-day and this take-it-or
leave-it scenario," said Derek Halpenny, European head global market
research at Bank of Tokyo Mitsubishi.
"But nobody in my view is ready to trade the 'Grexit' view yet. The
expectation is still that a deal will be reached."
In the bond market there was also mild caution. Benchmark 10-year
Italian, Spanish, Portuguese and Greek bonds saw yields nudge up
between 7 and 9 basis points as investors moved into the traditional
safety of German Bunds.
"It's a reaction to the IMF withdrawal ... a classic risk-off
pattern," said Christian Lenk, a strategist at DZ Bank.
As well as the surprise IMF move, the European Union told Greek
Prime Minister Alexis Tsipras to stop gambling with his
cash-strapped country's future and take the crucial decisions needed
to avert a devastating default.
Traders were also eyeing euro zone industrial production data due at
0500 ET for the latest reading of how the bloc's economy is faring
amid the uncertainty.
FINE CHINA
Asian shares had also had a subdued session overnight.
Activity was sparse with MSCI's index of Asia-Pacific shares outside
Japan up 0.2 percent, but only just above three-month lows. Japan's
Nikkei barely budged, though it found some support in a dollar
bounce against the yen.
China's market built on its long bull run as the Shanghai index rose
0.8 percent to its loftiest level since early 2008, with property
shares firmer on signs of a revival in real estate demand.
For emerging markets more broadly though it was less positive.
MSCI's main EM index was heading for its fourth week of straight
loss having matched its longest ever losing streak this week.
Early Wall Street futures pointed to a 0.3 percent lower start. The
Dow ended up 0.22 percent on Thursday, while the S&P 500 added 0.17
percent and the Nasdaq 0.11 percent.
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Sentiment was bolstered by a solid rise in U.S. retail sales which,
combined with upward revisions, suggested the economy was warming
nicely after a chilly start to the year.
If the momentum is sustained, the Federal Reserve could begin to
hike interest rates later in the year, with September increasingly
seen by markets as the lift-off date.
All of which sets the scene for the Fed's meeting on June 16 and 17
which will include a news conference from Chair Janet Yellen.
"We don't think the Fed will explicitly reference September, but we
do think they will harp on their data dependence and give a nod that
a hike this year is likely if the data remain constructive," said
Tom Porcelli, chief economist at RBC Capital Markets.
"And so far both the data and the market are on the right track."
The improving U.S. data helped the dollar index up to 95.173,
and away from a near one-month low of 94.322 set on Wednesday.
Against the yen, the greenback bought 123.46 yen, well off this
week's trough of 122.46.
The euro had less luck as talks on Greece showed no sign of reaching
a deal. The single currency was last off at $1.1232, from a high of
$1.1387 set on Wednesday.
Adding to the air of caution, German newspaper Bild reported Berlin
was holding "concrete consultations" on what to do in the case of a
bankruptcy of the Greek state, citing several people familiar with
the matter.
This includes discussions about introducing capital controls in
Greece if the crisis-stricken country goes bankrupt.
In commodity markets, oil prices dipped after Saudi Arabia said it
was ready to raise output further to meet strong demand.
Brent crude oil for July fell 38 cents to $64.73 a barrel, while
U.S. crude lost 45 cents to $60.32.
(Additional reporting by Wayne Cole in Sydney and Marius Zaharia in
London; editing by Anna Willard)
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