Daily Market Reports | Jul 06 2015
By Greg Peel
Reality
We can only assume that rallies on Bridge Street on Wednesday and Thursday last week, to take us back to the same 5600 level of a week ago, lent themselves to some level of expectation Greece would vote “yes” in its referendum, as the pools seemed to indicate, thus making a deal between Greece and its creditors finally achievable, and that Beijing would do whatever it had to to stem the tide of its crashing stock market.
For there really is no other explanation, and by Friday uncertainty was again prevalent. The polls in Greece had shifted to become inconclusive, and the Chinese stock market continued to fall, down another 5.8% on Friday to take its fall from the peak to almost 30%. The ASX200 fell again towards the critical 5500 mark.
Of little consequence on Friday was the potentially good news that Australia’s service sector PMI crept back into expansion territory in June with a 1.6 point rise to 51.2. I say “potentially” given Australia’s PMI results seem to be inexplicably volatile compared to the rest of the world, although not so much in the significantly larger service sector, more so in the small and ever diminishing manufacturing sector. Perhaps size is the simple reason, but given Australia’s economy is now very much service-driven, the PMI should at least be heartening.
Not so heartening was May retail sales, which at 0.3% growth missed forecasts of 0.5%.
And not so heartening was HSBC’s read on China’s service sector PMI, which fell to 51.8 in June from 53.5 in May.
No
Economic data are nevertheless but a sideshow this morning given the Greeks have voted with a resounding “oxi”. Uncertainty is now king.
Tsipras arguably whipped Greece into a frenzy of hatred towards the evil empire of Germany, the “terrorists” at the ECB and the general attack on Greek sovereignty with his desperate pleas on national television leading into Sunday. He also promised that were the “no” vote to prevail, he would jump straight on a plane to Brussels and have a new and less austere deal negotiated within 48 hours. The banks, he said, would then reopen on Tuesday.
All pure politics, of course, but unless Tsipras actually is a few olives short of a tapenade even he must appreciate that what he has said is very much detached from reality.
The eurozone and ECB are now hastily convening meetings to decide just what to do now, and presumably conceding to the will of the Greek people is not one of the options. If the Greeks are assuming the banks will open on Tuesday they could be in for a rude shock. It’s difficult to see why the ECB would extend any further emergency credit to Greek banks, whether or not Tsipras had called ECB officials “terrorists”.
It is difficult to see any path from here that does not involve Greece’s exit from the eurozone, despite there being no clause in the eurozone constitution outlining such a process. It is not clear whether the citizens of other peripheral nations will see Greece as the poster child and decide to follow suit. Presumably when Greece falls into abject poverty immediately following the reintroduction of the drachma, they may think twice.
Although the reintroduction of the drachma, and its significant devaluation to the euro, may just be what Greece needs to see its economy restored in two or three years from now.
One can speculate till the goats come home, but quite simply, nobody knows what happens now. Uncertainty is the enemy of markets, so we can only presume it could get ugly today and tonight as risk is quickly taken off the table.
In theory a Grexit is positive for the euro, given the remaining 18 member economies are stronger without the drag of Greece. But on immediate uncertainty, the euro has tumbled this morning in early trade. As a possible precursor of things to come, we note the Aussie was down 1.5% on Friday to US$0.7517 on Saturday morning and as I write is trading at US$0.7477.
China
But then there’s China.
There are still those who suggest that given the Chinese stock market has doubled in a year, even a 30% correction is not too concerning. But when 20% quickly became 30% last week, Beijing stopped being alert and started to be alarmed. The interest rate and RRR cuts it enacted over the prior weekend had had absolutely no impact.
Hence Beijing has now pulled out the kitchen sink. Hastily convened meetings this weekend have resulted in the government planning to provide direct assistance to investors looking to access margin lending to buy Chinese shares. IPOs have been banned for the time being, such that investors can only buy existing listed stocks. And the PBoC will look to establish what is known in the US as the Plunge Protection Team – a Fed special ops unit that works under a cloak of secrecy and steps into to buy US stocks at times of free-fall, using Fed funds, in order to stabilise the stock market.
Will these new measures have an impact? Well once more, nobody knows. We’ll only know later today when the Shanghai Exchange opens.
So we have what may well prove to be a Chinese stock market’s saving grace in action this morning, with the dark cloud of Greek uncertainty hanging low. There’s a bit of a gap from the world’s second biggest economy down to an economy half the size of that of NSW, when it comes to global financial markets, and thus in reality the Australian market should be more concerned today about what happens in Shanghai than what might happen in Brussels.
It’s all very well to say that, however.
The SPI Overnight closed down 7 points on Saturday morning, but that means nothing this morning.
Wall Street was closed on Friday night. European stock markets closed slightly weaker, but would have been squaring up ahead of the vote.
Commodity Crunch
With US markets closed, volumes were thinner than usual on the London Metals Exchange on Friday night. Fears about what might happen in Greece were sufficient to encourage selling, resulting in half to two percent falls for all base metals bar zinc, which fell only slightly.
Iron ore fell another US$1.70, or 3%, to US$54.10/t. The iron ore price fell almost 11% over the week.
For the oil markets, Greece has not been as much of a focus as global supply-demand issues, thus lower oil prices on Friday night were more about a US rig count which has started rising again. West Texas crude fell US$1.01 to US$55.50/bbl and Brent fell US$1.52 to US$60.33/bbl.
Gold was a tad higher on Friday night at US$1168.30/oz. One might assume the “no” vote would encourage gold buying this week but you just never know with the shiny metal these days. The US dollar index was slightly weaker on Saturday morning at 95.95 but that will be different this morning once trading ramps up.
The sovereign bonds of the likes of Germany, the US and UK will likely be sought after in the wake of the “no” vote while the US dollar, pound and yen will see safe haven buying. Risk assets will be sold.
The Week Ahead
There’s no use speculating. We’ll just have to wait and see.
The Fed will release the minutes of its last meeting on Wednesday which at least for a moment will refocus markets on Fed rate rise timing. The US will see its services sector PMI release today, trade balance on Tuesday, chain store sales on Thursday and wholesale trade on Friday.
Beijing will release China’s inflation numbers for June on Thursday.
The RBA will hold a policy meeting tomorrow. While no rate cut is anticipated, the very weak trade numbers prevailing in April and May will have given the board pause for thought.
Today sees the ANZ job ads series and the TD Securities inflation gauge. Tomorrow it’s the construction PMI and on Thursday the June jobs numbers are due. Friday sees housing finance – the other topic du jour.
On the local stock front, the first of the resource sector June quarter production reports will begin to trickle out later in the week.
Strap in.
Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon.
For further global economic release dates and local company events please refer to the FNArena Calendar.
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