Daily Market Reports | Jun 30 2015
By Greg Peel
The Dow fell 350 points or 2.0% while the S&P lost 2.1% to 2057 and the Nasdaq dropped 2.4%.
East Meets West
Last Friday the Shanghai stock market fell 7% to take its correction to close to 20%. On Sunday Beijing responded by cutting its interest rate for the fourth time since November. When Shanghai re-opened yesterday it did trade higher, very briefly. By early afternoon it was down 8%.
If there were no issue with Greece at present, one would not necessarily be surprised by the plunge on Bridge Street yesterday. If rapid-response monetary stimulus from Beijing is not enough to halt a Chinese stock market crash, what else can be done?
Beijing has been tacitly supportive of the runaway Chinese market, despite clamping down on margin lending loopholes and widening the opportunity for short-selling in order to prevent too much of a bubble. The Chinese have seen their property investments sour, so they turned to the stock market. Now that, too, looks like ending badly.
The good news is that after the Australian market closed, the Shanghai market staged a late rally to close down only 3.8%. That 3.8% still takes the correction over the 20% mark, but perhaps there is a ray of hope. Ignoring “bear market” suggestions, a market that doubles in less than a year can handle a 20% fall and still be well ahead. As long as the selling starts to abate.
The Australian economy needs a wealthy China, and a confident China. Yesterday the local market sold off across the board, with only a 3% fall for consumer discretionary standing out amongst what were otherwise fairly consistent sector falls of around 2%.
Of course, as traders remained glued to the Shanghai Exchange screen yesterday there was a big elephant standing behind them, called Greece. What will happen if Greece defaults to the IMF? No one knows – no common currency country has ever defaulted before. What happens if Greece exits the euro? No one knows.
Good news is good for stock markets and bad news is bad. But worst of all is uncertainty.
Greece
If the Greek economy fell in the forest, would anybody hear? No. There are twenty cities in China bigger, than Greece, which is why Wall Street, too, was less worried about Greece last night than it was about China. Greece is a minnow swimming in the same sea as a German whale in the eurozone waters. But the implication of a Grexit is that the eurozone experiment has failed, and that’s not what the German government, nor most of its fellow eurozone governments, wants to see. If Greece goes, who might be next?
The Greek crisis is thus more political than financial, but it still provides for uncertainty. It is notable that the euro was stronger overnight against the greenback, because a eurozone without Greece and its endless requirement for bail-out funds is a stronger economy.
The Greek banks are now closed for a week ahead of Sunday’s referendum. A “yes” vote means conceding to the creditors, copping the austerity, and staying in the euro. A “no” vote means telling the creditors to bugger off.
Alexis Tsipras was last night appealing to the Greek people to vote “no”, as he believes this is the best way to force the creditors into having to concede to a deal. European leaders were appealing to the people to vote “yes”, implying that’s the only way to stay in the euro. Recent polls suggest “yes” voters outnumber “no” voters two to one. If this is Sunday’s result, then the negotiations will start again. Presumably after Tsipras offers his resignation.
And then the whole sorry saga can drag on and on into eternity.
Puerto Rico
Bad luck, they say, comes in threes. With China and Greece causing a deal of concern on Wall Street last night, it was really not a good time for Puerto Rico, a member of the US commonwealth, to declare it was close to defaulting on its debt.
That’s its sovereign debt – government bonds – not an IMF obligation a la Greece.
Cleary Puerto Rico is also a minnow in the scheme of things, but that did not stop relevant US banks and bond insurance stocks from being carted last night, just to add to the maelstrom.
Wall Street is now down for the year, and unless tonight conjures up the mother of all window-dressing rallies for the end of quarter, it will be the first quarter in nine in which Wall Street has ended lower.
There was also much attention paid to the bond market, where the US ten-year yield fell 15 basis points to 2.33%. Such a rally in bonds lends itself mostly to Greece, with a bit of Puerto Rico thrown in. The German ten-year fell 12 basis points to 0.80% while the French dropped 5bps to 1.24%. The yields of Portugal, Spain and Italy all increased by 20-30bps, to illustrate contagion fear. However such moves are small compared to what was going on back in 2011-12 when last Greece was threatening to bring down the world.
The VIX volatility index on the S&P500 jumped a whopping 34% last night, just to underscore the uncertainty factor, but that only takes it to just under 19. It’s been wallowing around at a very complacent 11-12 up to now, and only when 20 is exceeded is it suggested markets are truly worried.
All this is going on in the lead up to what will no doubt be a much appreciated long weekend in the US, but before we get to that there is the small matter of the June jobs report on Thursday, and any subsequent Fed policy ramifications.
With the euro rallying, the US dollar index is down 0.5% to 94.90. If the world truly were panicked about Greece, gold would have rallied more than US$5.90 to US$1180.10/oz.
Commodities
In commodity markets, there was also more going on than just Greece.
The Shanghai Futures exchange last night announced it will accept three Norilsk nickel brands for delivery against its nickel contract, thus expending the pool of deliverable metal. Nickel subsequently fell 5% on the London Metals Exchange. Otherwise, tin was the only base metal to move significantly last night in the uncertain conditions, down 3%. All others were mixed on small moves.
Iron ore fell US20c to US$60.50/t.
For oil markets, Greece is one focus of attention but another is tonight’s deadline for Iran to reach an agreement with the West regarding its nuclear policy and resultant economic sanctions. If an agreement can be reached, Iranian oil exports will flow once more. If not, the deadline will be extended.
Last night West Texas fell US$1.42 to US$58.23/bbl and Brent fell US$1.13 to US$62.04.
Today
The SPI Overnight closed down 34 points or 0.6%. Presumably this reflects a 350 point plunge in Wall Street, but if so, how much is double-counting from yesterday?
The critical market today will again be the Shanghai stock market. Tonight Greece will be in arrears to the IMF. The Fed has said it will not step in and prop up Puerto Rico, just as it didn’t step in to prevent the city of Detroit defaulting on its municipal bonds.
Anything can happen, and probably will.
Locally we’ll see new home sales and private sector credit numbers today, in case they matter right now, and tonight Glenn Stevens will deliver a speech in London.
Tonight also sees a flash estimate of eurozone June CPI, in case that matters right now, and a consumer confidence survey will hit the wires on Wall Street.
And today is the end of financial year. Enjoy.
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