Daily Market Reports | Jun 22 2015
By Greg Peel
Restored
The wider world may have been worrying about Greece on Friday but clearly there were no concerns on Bridge Street, where an across the board rally restored the ASX200 to the level it had attempted to reach on Wednesday, being just below 5600. Wednesday’s attempt was thwarted by a big sell-off on Thursday, which appears to have been purely related to the expiry of futures and index options.
The index rallied 1.3% on Friday and there was little variation from this average among sector moves, suggesting this was very much a “Buy Australia” trade. This implies a level of foreign participation, which is fitting given it was foreigners who bailed out of the Australian market earlier in the month to send it hurtling down to just below support at 5500. The earlier support level of 5600 will now become resistance as the market looks for some stability.
Immediate stability may well depend on Greece.
Bewitched
In Australia, derivatives expiries are split into two sessions, being futures and futures and ASX index options on the second last Thursday of the month and stock options on the last Thursday of the month. While derivatives expire every month, quarterly contracts are still by far the most popular, thus June is one of four big expiries months and also end of financial year for most, thus offering potentially the greatest level of volatility, as was seen on Thursday.
While June is not EOFY in the US it is still a major expiry month, and on Wall Street all four equity derivative classes expire on the third Friday of the month. Hence the label “quadruple witching”. This occurred on Friday night, and while the US indices were soggy for most of the session, a late selling rush was attributed to expiry.
The Dow closed down 99 points or 0.6%, the S&P lost 0.5% to 2109 and the Nasdaq pulled back 0.3% from Thursday night’s all-time high. Sogginess on Wall Street was attributed to Greece.
The Greek situation is currently a very fluid one, with much development between the close of Wall Street on Friday and this morning. On Friday night the only news was that the ECB had been forced to extend emergency funding to Greek banks as a run on those banks accelerated in earnest. On Friday night it was assumed Greece and its creditors were still at a position of stalemate, with the creditors having now drawn a line in the sand and the Greek government having rejected that line.
It was also known that the EU leaders had brought a meeting previously scheduled for this Friday forward to tonight. With negotiations seemingly at an impasse and money pouring out of Greek banks, the assumption was that this would be a crisis meeting convened not to try to come up with a new deal to offer Greece, but to prepare for the fallout from a Greek default.
To that end, the US ten-year bond yield fell 8 basis points to 2.27% on Friday night.
White Flag?
However yesterday morning, the news was that the Greek prime minister would present a new deal to the creditors tonight. As a result, the eurozone finance ministers have hastily organised to meet again tonight, having met only on Thursday night, the sole purpose being to discuss what Tsipras is now offering. The finance ministers will meet ahead of the meeting of EU leaders.
This morning the news is that the new deal offered by the Greek government is, in Tsipras’ words, “mutually beneficial” to both parties. Tsipras has spent the past couple of weeks calling the creditors’ demands “absurd”, and last week the IMF withdrew from negotiations saying only that it expects its money on June 30. Has Tsipras being playing the game to the eleventh hour in the hope the creditors would buckle, only to find that ultimately it is he who must buckle?
The suggestion is that the new deal offers some ground on the particular sticking points of the creditors’ reform package, including an increase in the pension age and a broader based consumption tax. Maybe if the concessions are sufficient for an EU and eurozone not wishing to see an exit of one of its members, then the day might be saved.
However, this would mean tougher austerity ahead for Greece, and that’s exactly the opposite of the platform upon which the Greek left wing coalition was elected. Yet polls suggest 62% of Greeks want to stay in the euro, so we have a rock and a hard place situation, or a cake and eat it too. Were the creditors to accept Tsipras’ new proposal, the deal will have to be taken to each of the seventeen eurozone parliaments for approval. The questions then are (1), will every parliament provide approval – some leaders have been vocal on the “kick them out” side – and perhaps more importantly (2), will the left wing majority Greek parliament concede to tougher austerity measures and thus a betrayal of their electors?
If not, well, who knows what happens next. The process of parliamentary approval will probably take longer than the week available before the IMF repayment is due, but then if it looks like a deal may have been reached, the IMF can always hold out for a bit.
The ECB may be a creditor and at this stage the only lifeline Greece has ahead of a bank collapse, but the central bank is likely to take direction from what the politicians decide. No doubt the ECB will extend further emergency funds to Greek banks tonight ahead of the various meetings. As for tomorrow night, that remains to be seen. If there is no resolution, presumably currency controls will be put in place in Greece tomorrow night.
Watch this space.
Commodities
While Greece has been drawing the world’s focus, the Chinese stock market has been quietly plunging.
On Friday the Shanghai index fell 6.4%, bringing the fall from its peak a bit over a week ago to 11%. Once upon a time, this would have spooked the hell out of regional markets, including Australia’s. Readers may recall it was the “Shanghai Surprise” of February 2007 that set in train a serious of global sell-offs that also initially surprised, before ultimately leading the world to learn of things called “subprime mortgages” in the US.
But on Friday, all regional stock markets, including Australia’s posted solid gains. Given the Shanghai index has doubled and tripled in such a short space of time, driven by the end of China’s property boom and accommodative policy from Beijing, any correction would need to be rather substantial before global markets are really going to become concerned.
While the correlation is potentially a little spurious, it is interesting to note that in the time the Shanghai index has fallen 11%, the spot iron ore price has fallen 7%. On Friday the iron ore price fell another US20c to US$60.70/t.
Falling stock prices in China introduce a new concern for LME traders, who are already worried about Greece and Fed rate rise timing. On Friday night all base metals bar tin fell 0.5-1.5%, led by copper.
Over in the oil markets, amongst everything else going on in the world the Saudi oil minister suggested on Friday night that if were demand for oil to improve, OPEC would not hesitate in further increasing production. If so, this would rather put a cap on any potential oil price rise from here.
West Texas fell US$1.03 to US$59.46/bbl and Brent fell US$1.37 to US$62.87/bbl.
The US dollar index was relatively steady on Friday night at 94.09 and ditto gold at US$1200.30/oz. The Aussie was down 0.3% on Saturday morning at US$0.7772.
The SPI Overnight closed down 3 points.
The Week Ahead
Greece: see above.
It must be noted that the consensus view amongst fund managers has long been, and still is, that somehow, in some way, the Greek can will get kicked down the road. That’s why unlike years gone by when the potential for a Grexit sent markets spiralling, not a lot of angst has been evident this time around. On that basis, were a resolution to come out of tonight’s negotiations, any relief rally would be minimal given there has been no great sell-off so far.
If Greece does default, well, nobody knows.
Chinese markets are closed today for Dragon Boat Day, as you do.
Tomorrow sees a flash estimate of China’s June manufacturing PMI from HSBC, alongside equivalent flashes from Japan, the eurozone and US.
It’s a busy week of data in the US for the data-dependent Fed, and thus the market, to contemplate. Tonight sees existing home sales and the Chicago Fed national activity index, tomorrow brings new home sales, FHFA house prices, durable goods and the Richmond Fed activity index.
On Wednesday the US March quarter GDP is revised for the last time before the first estimate of June quarter GDP is released next month. Economists are forecasting a revision up to minus 0.2% growth from the previous minus 0.7%. Personal income & spending numbers are out on Thursday and consumer sentiment on Friday.
Australia will see a quarterly house price index out tomorrow in a week largely devoid of fresh data. As noted, stock options expire on Thursday.
On the local stock front, there is a large number of mostly REIT/infra names going ex-div on Friday.
Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon and again on Friday, 8-9pm, for Your Money, Your Call – Bonds versus Equities.
For further global economic release dates and local company events please refer to the FNArena Calendar.
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