The Monday Report

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By Greg Peel

Greece

There is little point in reviewing the action in the local market on Friday and the offshore markets on Friday night before taking note of developments in Brussels over the weekend. Suffice to say that while markets were optimistic on Friday, we are effectively left with “no deal” this morning.

The game’s not ever yet, nonetheless.

We recall that last weekend the Greeks voted “no” in the referendum, thereby implying they were not in favour of further austerity measures and if that meant exiting the eurozone, so be it. They were told by Tsipras that a “no” vote would give him greater bargaining power.

Then Tsipras went back to Brussels with a new deal that, strangely, conceded to some of the reforms that have been demanded by the creditors all along. On Saturday the Greek parliament provided a vote of approval for the new deal. One wonders what the referendum was all about.

On Sunday the eurozone finance ministers met to discuss Tsipras’ new proposal and decided that while it was a step in the right direction, it was nevertheless not quite sufficient to ensure a new bailout would be forthcoming. Given this meant “no deal” as yet, a planned emergency meeting of all 28 EU leaders was cancelled but a meeting of the 19 eurozone leaders went ahead instead.

With the likes of France and Italy supportive of the new deal but Germany and others still not satisfied, Tsipras has been told that the Greek parliament must pass his new reforms, regarding pensions, VAT and other concessions, into law by Wednesday. He must also enact further reforms demanded by the creditors, including a step-up in privatisation.

Then the meetings held yesterday will all be held again this coming weekend, to either approve a third bailout for Greece or to plan for Greece’s “temporary” exit of the eurozone.

China

Hope of a Greek deal being reached was one driving factor on Bridge Street on Friday but realistically all eyes were on Shanghai, where ultimately the Chinese index closed up another 4.5% to mark the largest two-day gain in seven years. That is, of course, with only half of the listed stocks on the exchange open for trade.

It may be that the Chinese stock market has now found a bottom but this has not exactly brought a huge sigh of relief on Australian or other markets, given it is a bottom completely orchestrated by the Chinese communist government. As to if and where the Chinese market might have turned around eventually without intervention, we’ll never know. But at least it has made for an uneasy calm for now, reflected in a choppy session on Bridge Street which saw the ASX200 bounce around the technically significant 5500 level before settling just under it.

The index was up as much as 57 points at lunchtime but being a Friday, and knowing that Greece’s fate lay in the balance over the weekend, positions were squared through the afternoon.

Optimism

While European markets are not ignoring China, they are far more focused on the Greek drama at present as one might expect. On Friday night a deal between Greece and its creditors that would end the whole Grexit risk story appeared as close as it has ever been. Subsequently the German and French stock indices both rallied around 3%.

Once again that mood flowed into the open on Wall Street, sending the US indices soaring from the bell. But while often such influence fades late morning when European traders go home, resulting in a turnaround, this time Wall Street actually kicked a little higher to the close.

The Dow closed up 211 points or 1.2%, the S&P gained 1.2% to 2076 and the Nasdaq rallied 1.5%.

With all the rocking and rolling, it is interesting to note both the Australian and US stock markets ended the week basically where they began.

Wall Street was optimistic about Greece but also relieved about China on Friday night. The US is not an exporter of raw materials to China given the US economy consumes all it produces, but the prices of those commodities are still impacted by global trade and thus China. More significantly, China offers a vast consumer market only now beginning to suck up everything from iPhones to Cadillacs, thus China is vitally important as an export destination for US goods and services.

Thus in a similar vein as Australia but from the other end of the production line, China matters to America too.

But America’s own economy is never far from the minds of Wall Street traders and to that end there remain two pressing points at present – the endless debate about the first Fed rate rise and the June quarter corporate result season, which ramps up in earnest this week.

On the former, Friday night saw Janet Yellen reiterate her earlier suggestion that the first rate rise will most likely occur in 2015, assuming the US economy continues to improve at its current pace. While this comment seems suddenly hawkish compared to what was perceived as a more dovish last Fed policy statement, it represents no change in earlier Fed rhetoric.

The June Fed statement gave a nod to international considerations, including a plunging Chinese stock market and the growing possibility of a Grexit, but it appears now as both those issues have been or will be resolved. It may still be, nevertheless, that the Fed holds off until December rather than moving in September, but the jury is still out.

The US bond market certainly took Yellen’s comments on board but realistically moves higher in German and other European yields on Friday night also helped drive the US ten-year bond up 12 basis points to 2.42%, again a similar level to where it began the week despite having flirted with 2.20% in the interim.

The US dollar index fell back 0.5% to 86.03 on euro strength.

Commodities

The iron ore price has not yet returned from whence it came but another US$1.60 gain to US$49.90/t on Friday suggests the stock market-related selling that sent iron ore crashing during the week has now reverted to buying as the Shanghai index recovers.

Base metals quietened down ahead of the weekend’s Greek proceedings. Lead and nickel saw falls in excess of 1% but the other metals were steady.

Greece and China are also impacting on oil markets but so too are the ongoing nuclear negotiations with Iran which, like the Greek saga, seem to go on and on. The same optimism over Greece and China which lifted other markets was also evident in oil markets on Friday night, with West Texas crude up US25c to US$52.84/bbl and Brent up US22c to US$58.69/bbl, but caution over the implications of an ever-nearing lifting of Iranian sanctions are keeping oil traders cautious.

Gold rose US$3.60 to US$1162.80/oz.

The Aussie has stalled completely at US$0.7447.

The Week Ahead

The SPI Overnight closed up 35 points or 0.7% on Saturday morning given solid gains in Europe and the US, but given those gains were driven by expectations of a Greek deal been reached on the weekend such strength may be tempered when the SPI reopens at 9.30am.

Traders will continue to watch the Chinese stock market this week, although it appears now the “put option” of government intervention has limited any possibility of further downside. The focus will then swing to actual Chinese economy data (or at least, as “actual” as we can take Chinese economic data to be).

Today sees China’s June trade numbers and Wednesday brings industrial production, retail sales and fixed asset investment, along with the all-important June quarter GDP result. Consensus has China’s growth slipping to an annual rate of 6.8%, down from 7.0% in the March quarter.

As the Greek drama plays out for yet another week, actual eurozone economic data will also be in focus and out of the spotlight of negotiations in Brussels, the numbers have been pretty impressive of late. This week sees industrial production, investor sentiment, inflation and trade data and on Thursday the ECB will hold a policy meeting.

Earnings results will dominate Wall Street this week but there are also plenty of economic releases due. Tomorrow night it’s retail sales and business inventories and Wednesday brings industrial production, the PPI, the Empire State activity index and the Fed Beige Book. Thursday it’s housing sentiment and the Philadelphia Fed activity index and Friday it’s the CPI, housing starts and fortnightly consumer sentiment.

Australia’s economic highlights this week will be the NAB business confidence survey on Tuesday and the Westpac consumer confidence survey on Wednesday.

On the local stock front, the resource sector quarterly production report season hots up towards the end of the week with Rio Tinto ((RIO)), Iluka Resources ((ILU)), Whitehaven Coal ((WHC)), Woodside Petroleum ((WPL)) and Santos ((STO)) all in the mix.

Rudi will not make his weekly appearances on Sky Business this week due to other commitments.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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