Markets say 'Yes' to Greece Proposal, Onto China

Euro & equity futures rally across the board, cheering the latest Greek proposal but regardless of the outcome the driver of the second-half of the year is much more likely to be China. On Thursday, markets were more settled with CAD leading and JPY lagging in a minor retracement. Japanese PPI is up next.

Greece finally delivered a post-referendum proposal and it's triggered a quick rally in the euro. Greece seeks a 3-year loan under ESM funding worth EUR 53.5 bn, including small pension reforms and higher corporate taxes, including the sale of  Tsipras reportedly told a Syriza meeting to be ready to compromise in a sign that he wants to make a deal. Initial reports said it's similar to an EU proposal from late June so that will probably lead to a deal. The risk might be Greek hardliners vote against it. Bloomberg says the proposal is similar to that of the EU's on June  26.

Debt may prove the sticking point in negotiations with German leaders digging in and shunning haircuts. Very little has been sorted on debt and Greece can't sustain its current load.

The euro rallied to 1.1065 from 1.1035 shortly after the deal after falling to 1.0991 from a high of 1.1125 in US trading. EUR/JPY quickly gained 70 pips on the proposal.

What unfolds in Greece is critical for the next week in markets but what happens in China will matter for months. Officials are increasingly signalling that they won't tolerate slower growth or stock market declines. The stock market correction is still relatively small compared to the 150% rally over the past year and banning short selling is a panic move.

The takeaway is that China bent on high growth and talk of painful reform is hollow. Once the dust settles, that will underpin commodity currencies and China-connected companies.

In the immediate term, look to Greek headlines for guidance. Japanese PPI is also due at 2350 GMT amidst a report in Nikkei that the BOJ may lower its 2015 growth estimate from 2.0% closer to the consensus at 1.0%.