Equity markets continue to perform well; helped along by the bounce back in oil prices; and more certainty around the first US rate rise. However; the eyes of the world are on Greece this week as the country stares down its creditors.
Finance ministers from the euro-zone are trying to reach a deal on Greece that would enable the country to meet its near-term financial obligations.
If Greece were to leave the Euro, the initial fallout for financial markets could be substantial. First to come under fire would be the Euro - even though authorities have put in place measures to head off contagion. However; the rising popularity of anti-austerity parties in Europe means investors are unlikely to be convinced that Greece’s departure is a one-off.
I also suspect that government bond yields in other troubled euro-zone countries would climb from their current low levels; whilst equity markets would come under pressure.
The recent fall in the Euro has given equities in the euro-zone a lift recently.  Quantitative Easing has rightly been seen as a means of conquering deflation and bolstering the outlook for earnings. But if the Euro falls further in the event of Greece’s departure equity markets would probably fall as it would shake investor confidence.
The price of Brent oil has rebounded over the past couple of weeks; supporting the view that oil prices will average around $65 in 2015. The bounce back appears to have been driven by the sharp drop in the number of drilling rigs and the slew of announcements from major oil companies that they are cutting back on investment.
We expect further decreases as more drilling rigs come to the end of their production runs and other major oil companies announce investment cuts.
All this will help the price of Oil to grind slowly higher over next few years. High stock levels and the potential for US shale producers to ramp supply back up quickly will prevent prices from surging.
Also US government bond yields have risen since the beginning of this month, especially in the wake of the stronger-than-expected Employment Report for January.
The outlook for the Federal funds rate over the next few years remains well below its most likely path. And more generally, investors tend to ratchet up their expectations for future short-term interest rates hikes once the US central bank has begun to tighten policy - not before.
If I am right, the US government’s long-term borrowing costs are likely to rise but not sharply.