Tag Archives: Europe & UK

article 3 months old

Greece Dominates, But Could China Be the Real Problem?

By Kathleen Brooks, Research Director UK EMEA, FOREX.com

After the Greeks voted No in Sunday's referendum the focus has shifted to what happens next. Will its banks collapse?  Will it have to leave the Eurozone? These are the two most pressing questions for investors. As you have probably heard, the markets are remarkably calm. Stocks are trying to recoup earlier losses, while EURUSD volatility is lower than it was during last month's peak.

As we mentioned on Sunday evening, the market reaction has been less severe than last week when capital controls were first announced. The relative stability may be down to a few of things: 1, investors are still hopeful that a deal can be reached to save Greece, 2, if no deal is reached then the European authorities will give Greece the help it needs to leave the Eurozone gracefully, 3, intervention from global central banks to stem excess volatility in the FX market, and protect the downside for the EUR.

Are markets too optimistic?

We do not think that this calm is truly pricing in the possibility of a messy exit, which could cause a 2012-style surge in volatility in the short-term. But, in the long-term, as ex Fed President Fisher said on TV earlier today, in the end the euro could be stronger without Greece.

Greece in conciliatory mood

For now, we still have to understand the post-referendum stance of all parties. The Greeks look like they could be in conciliatory mood after the resignation of the controversial finance minister. We have heard murmurs of disapproval from the heads of some European institutions, the most threatening comments are emanating from the German finance ministry, which included comments that Bundestag approval will be needed before talks with Greece can resume, and a reiteration that Greece won't get new aid without conditions.

Merkel to take the lead, ECB in the background…

As we have mentioned in the past, we believe that German Chancellor Merkel's decision will be the deciding factor. The eerie market quiet today could be the sound of investors' waiting on the side-lines for the outcome of tomorrow's European leaders' summit when Merkel's position on Greece could be made public. Until then we are still waiting to see how the ECB will react to the Greek referendum result and what it means for the Greek banking sector.

Consensus seems to be forming around three potential paths that the ECB can take:

1, continue to maintain liquidity levels at their current rate, but not turn the taps off completely until more is known about a potential Grexit.

2, The ECB could give a final deadline for ELA funding to the Greek banking sector, regardless of what has been decided by the European authorities.

3, If the ECB wants to play good cop, then it could sit on the side-lines until Athens' future becomes clear. Once a potential Grexit is announced, the ECB could offer the Greek banking sector a period of grace - say a month or two - in which they continue to extend ELA funding giving Greece time to get its banking sector in some sort of order so that it could exit the Eurozone as gracefully as possible.

As you can see, with European officials reluctant to make any hasty decisions about the future of Greece the outcome remains extremely uncertain, however this uncertainty is being translated into inertia rather than panic in financial markets.

The moderate reaction to the latest phase in the Greek saga has implications for stock markets. As we mentioned last week, there is a positive correlation between German and peripheral bond yield spreads and the Eurostoxx index. Although spreads did fall as peripheral bond yields outpaced German yields, the fall was fairly moderate, which is reflected in the moderate decline in the Eurostoxx index (see figure 1).

Where do markets go next?

We continue to think that this situation is EUR negative, and once this potential intervention ceases we could see EURUSD grind down towards 1.05 then towards parity. However, if 1-month EURUSD volatility does not spike above the 15 level then it could be a slow, winding path for EURUSD from here.

Stocks are at a pivotal level. The Dax is currently testing the 38.2% retracement level of the October low – April high.  This is an important Fibonacci level, and if we break decisively below here then it would be a very bearish development and also suggest that Europe's main indices may have seen their highs for the year in April. This is not all down to Greece, volatility in Chinese stocks, which have seen huge price swings in recent days. If the Chinese authorities can't get the Shanghai Composite index under control then risk sentiment could suffer across the Asia region and further afield.
 



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article 3 months old

The Overnight Report: Commodities Cop The Bulk Of It

By Greg Peel

The Dow closed down 46 points or 0.3% while the S&P lost 0.4% to 2068 and the Nasdaq fell 0.3%.

Rock’n’Roll

The ASX200 fell 100 points from the opening bell yesterday, which we can blame on Greek “no” vote fear. But it quickly found sufficient support to rebound to be around 70 points down by mid-morning. We might suggest (a), the Australian market has already taken a good hit on Greek fear, and Greece is not really a major influence on the Australian economy and (b), measures undertaken over the weekend suggested the more important market to Australia – China’s – just might find a bottom.

Sure enough, when the Shanghai Exchange opened late morning Sydney time, the Chinese index rallied close to 8%. Yet while one might expect this to provoke some more buying on Bridge Street, instead the ASX200 simply hung in space. It continued to hang in space as the Chinese rally quickly retreated, all the way to unchanged by the time the Australian market closed. Yet a little kick at the death saw the ASX200 finish 63 points down.

A kick at the death saw the Shanghai index finally close up 2.4%. Interestingly, despite the 30% drop the index has suffered, its prior exponential rally means the 30% odd correction has only taken the index back to its 200-day moving average.

Yesterday’s local sector moves featured a 2.5% drop for energy, compounded by a lower oil price, and 1.7% for materials, ditto iron ore. Otherwise, cyclicals copped it more than yielders, with the telco falling the least (-0.3%) and the banks holding up (-0.8%) as all other sectors fell over 1%.

While yesterday’s overall session was clearly “volatile”, the fact the index barely moved for the greater part of day, once having adjusted, suggests that at levels under 5500, investors are prepared to weigh up the balances and remain poised for whatever happens next.

From the “for what it’s worth” department, yesterday’s data releases included a 1.3% pop in job ads in June, according to ANZ, after a flat May, to an annual growth rate of 10.8%. This looks very positive, and the recent trend goes a long way to explaining why Australia’s unemployment rate has behaved itself when many expected it not too, but ANZ’s own economists warn against complacency.

What we’re seeing, notes ANZ, is a promising shift to growth in service sector employment, but this will prove fleeting on a net basis as the reduction in mining employment gives way to a big reduction in energy sector employment as the big LNG projects reach completion.

TD Securities’ inflation gauge showed a 0.1% increase in June to a headline annual rate of 1.5%. The core rate of 1.4%, which is the RBA’s benchmark, is in no way preventative of another rate cut.

Greece

The bad news for the Greeks is that the banks will not reopen tonight, as the finance minister had promised. His resignation came out of the blue but is no great surprise given he’d already been benched by Tsipras in negotiations with the creditors for being too much of a hot head, and clearly there’s little value in him hanging around now those negotiations have reached a critical point.

The good news is the ECB will continue to extend emergency funds to Greek banks, albeit with two caveats. The first is no increase on daily funding from last week’s level, meaning the banks are still at risk of running out of physical cash given long lines at ATMs. The second is a haircut on collateral, such that the assets the ECB requires to be put up against emergency loans, for example mortgages, will be valued less highly than they were last week, implying less bang for the collateral buck.

There is good news in that the German and French leaders, following a hasty phone hook-up, have told Greece “the door is still open”, but while Hollande is seemingly a little more sympathetic, Merkel remains insistent there will be no debt relief provided.

If the creditors wrote down the money owed by Greece, they’d have to do it for all eurozone members who would quickly put up their hands.

Eurozone officials are meeting tonight, so yet again it’s a case of waiting and watching.

Commodity Crash

The West Texas crude price and the iron ore spot price have been tracing out very similar price paths, down to the dollar, despite having little connection other than being vital global commodities. Following both falling into the forties, and then rebounding into the sixties, both had started to look wobbly even before Grexit fears intensified and China’ stock market tanked in earnest.

Thus it wasn’t going to take much to tip those prices over, and last night West Texas crude fell US$2.81 or 5.1% to US$52.69/bbl and iron ore fell US$2.10 or 3.9% to US$52.00/t. Brent crude was even harder hit, falling US$3.52, or 5.8%, to US$56.81/bbl.

Brent is the global benchmark oil price, and its fall reflects a switch in focus from supply-side issues – OPEC stubbornly pumping furiously and the US rig count now growing again – to demand-side issues – weaker demand from Europe and China. Falling Chinese steel production has been the red flag for the iron ore price, and China’s stock market correction, with a bit of Greece thrown in, has also directed focus towards demand.

Copper is the base metal benchmark, and last night it fell 3.2% on the LME on a similar basis. But other than a 2.5% fall for typically more volatile nickel, moves for other markets were not too severe.

Wall Street

European stock markets have already pulled back a long way thanks to Greece, so while the German DAX fell 1.5% last night and the French CAC 2.0%, it could have been a lot worse. That mood flowed over to New York from the open, and the Dow promptly fell 166 points.

But an hour and a half later, the Dow was back to square on the session. It only started to tip over again when someone pointed out what was happening on the Nymex. The big drop in oil prices impacted on the US energy sector, and Wall Street closed marginally weaker as a result. But all things being equal, Wall Street largely took Greece, and China, in its stride.

This was not so much the case in the US bond market, where a flight to safety saw the ten-year yield drop 12 basis points to 2.28%. The other supposed safe haven, gold, put on a typical rabbit in the headlights impression and is little changed at US$1169.80/oz.

The US dollar index is stronger, as might also be expected on a safe haven basis, although given similar attraction to the pound, yen and Swissy, the index is up only 0.3% to 96.27, with the euro the main victim.

The Aussie is down 0.3% to US$0.7496.

Today

The RBA board might otherwise be pleased the Aussie is now lower, when it meets today, except for the drivers responsible. China is the big worry, and falling commodity prices only enhance the problem. Australia’s March quarter GDP result may have surprised to the upside, but the first two months of the June quarter have seen a worrying trade deficit blow-out and if oil and iron ore tumble back down again, it won’t get any better.

Still, no one is calling a rate cut today.

The futures market is calling some relief on Bridge Street today, given global stock market falls were not as severe as feared. The SPI Overnight closed up 19 points or 0.4%.

Tonight sees the Greek saga continue.
 

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article 3 months old

The Monday Report

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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article 3 months old

Next Week At A Glance

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.


By Greg Peel

Yes or no? Presumably we’ll know sometime on Monday or Tuesday. Then what happens? No idea.

But life will go on.

For Australia, next week will be otherwise dominated by the RBA policy meeting on Tuesday and the roll-of-the-dice jobs numbers on Thursday. While it is not likely the RBA will cut its rate this month, it may provide hints as to whether it might be leaning in that direction following some disturbing trade numbers..

We’ll also see ANZ’s job ad series on Monday.

Central bank focus will also prevail in the US next week with the release of the minutes of the June Fed meeting. In this case, hints will be sought with regard the timing of the first Fed rate rise.

US data releases next week include the services PMI, trade balance, chain store sales and wholesale trade.

Germany will release industrial production data next week which will remind us that there actually is more going on in Europe than just the obvious. The Bank of England will hold a policy meeting but with UK data disappointing of late, there are no expectations of any policy changes.

China will release inflation data on Thursday.

In the local stock market, the end of next week ushers in the first of the June quarter resource sector production reports. The trickle will turn to a flood in ensuing weeks.
 

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article 3 months old

The Overnight Report: Holding Pattern

By Greg Peel

The Dow closed down 27 points or 0.2% while the S&P was flat at 2076 and the Nasdaq lost 0.1%.

What Crisis?

The ASX200 closed last Thursday at 5600. The ASX200 closed yesterday at 5600. One would be forgiven for thinking there was not much going on in the world at present.

On Monday the ASX200 closed at 5422, following the worst session on Bridge Street in three years. That 2.2% drubbing, and in general the 3.2% fall from last Thursday to Monday, was all about joining in the global risk adjustment for a possible Greek exit, and all about a Chinese market plunging to a 20% correction. A Grexit is no less possible now than it was a week ago, and the Shanghai index has done nothing but fall ever since.

Yesterday revealed Australia’s trade deficit retreated to $2.75bn in May, following April’s blow-away record of $4.14bn. While that looks like good news, the fact is it’s still a significant deficit for an export economy, and it missed forecasts of $2.2bn.

Exports rose a net 1%, including a 6% rise for iron ore and 9% for coal. While there was some price improvement from April to May, increased values reflect increased volumes, and prices have since begun to fall back again. A 4% drop in imports included a 16% drop in capital goods, reflecting rapidly diminishing resource sector construction, often erroneously referred to in the press as “the end of the mining boom”.

Despite the improvement from April to May, these are not numbers that would warm the cockles of a central banker’s heart. It is notable that while the ASX200 rallied from the open yesterday, with a little help from a positive Wall Street, the rally initially stalled. Only after the release of the trade balance numbers did the index really take off.

This might suggest the market was yesterday driven by a Wall Street-style “bad news is good news” expectation that the RBA will have to cut again. Certainly, the banks led the charge. Utilities also had a good session. But so did materials and energy, despite lower commodity prices, and despite the fact that while these sectors do contain some reasonable dividend payers, they're not really “yield” sectors.

The underperformer on the day was the telco. Furthermore, the most volatile market of all when it comes to RBA speculation is the currency market, and the Aussie barely moved.

We might perhaps give a nod to a sudden burst of M&A activity, which started with Buffet and IAG, has seen rumours around Woolies, saw Asciano leap on Wednesday, and saw something funny going on yesterday in BlueScope.

Or we might simply assume yesterday saw a “Buy Australia” order or two from offshore and the momentum fed on itself. We’re certainly not going to look a gift horse rally in the mouth, but you have to admit, things are all just a little bit crazy at present.

On the subject of China, having failed to stem the tide of falling stock prices with last weekend’s rate cut, Beijing has taken to more drastic measures. Yesterday the government introduced rules to allow Chinese investors to put up their houses as collateral for leveraged share market investment.

What could possibly go wrong?

Greece

I have declared this morning’s Report a Greece-free zone. You all know the story.

Wall Street

The US added 223,000 jobs in June, short of expectations. The unemployment rate fell to 5.3% from 5.5% to mark its lowest level in seven years, but only because the participation rate fell back again. Some 432,000 left the workforce in June, mostly reflecting school leavers who stepped out into the world and promptly crawled back under the doona.

Wage growth was flat in June, for a 2% annual rate.

It’s another one of those neither here, neither there non-farm payrolls results. In isolation it would not drive any expectations of a Fed champing at the bit to make its move. But we know that the Fed is champing at the bit to make its move – at least many in the FOMC are – and thirteen months of 200k plus job additions out of fifteen would seem reason enough to finally shift off zero, if just to test the waters.

The result is probably not enough to stave off a September rate rise.

There was certainly no emphatic response in US markets. The dollar index dropped, but only by 0.2% to 96.10. The US ten-year yield dropped, but only by 2 basis points to 2.39%. The stock indices actually opened higher before drifting lower to midday and drifting back up again to a modest closing loss.

One has to take into consideration (1), most of Wall Street would have cleared off by lunchtime to get to their Fourth of July holiday destinations and (2), no one would want to go home with a big position in either direction ahead of Sunday’s Greek referendum.

Ironed Out

The iron ore price has fallen US$3.10 or over 5%, to US$55.80/t. The fall has been blamed on the latest Chinese steel production data, which showed a big drop.

And for the first time since December, weekly US rig count data showed an increase last week rather than a decrease. The irony here is that many a rig has been switched back on thanks to the oil price’s bounce back up to 60, but higher production could well see oil back in the 40s again.

The market’s response was not too dramatic, with West Texas falling US37c to US$56.51/bbl and Brent falling US18c to US$61.85/bbl.

An 1% rally for nickel and a 1% drop for zinc were the biggest moves in an otherwise mixed and uneventful session on the LME.

Gold continues to drift away, falling another US$2.70 to US$1165.60/oz.

The Aussie is 0.2% lower at US$0.7634.

Today

The SPI Overnight closed down 23 points or 0.4%.

It’s service sector PMI day today across the globe, with the exception of the US. HSBC will wave the flag for China.

Locally, we also see May retail sales numbers.

Wall Street is closed tonight.

I assume that when I sit down to write The Monday Report on Monday morning, they’ll still be counting in Greece. Unless the result is already decisive one way or the other.
 

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article 3 months old

The Overnight Report: Descent Into Farce

By Greg Peel

The Dow closed up 138 points or 0.8% while the S&P gained 0.7% to 2077 and the Nasdaq added 0.5%.

Freight Train

The first local session of FY16 began with a flurry to the upside and was boosted by a takeover bid for rail haulage company Asciano. That stock jumped 17% and helped float all boast in the transport logistics space, pushing the industrials sector index up 4% to lead the day.

If fund managers were opening fresh accounts for the new year, growth was on the menu and solid gains were seen for healthcare, energy and consumer discretionary while staples, the telco and utilities – the yielders – were left behind. The banks split the difference. Materials was the only sector to fall, following a drop below 60 for the iron ore price.

Nor was the materials sector provided much support from China’s PMI releases on the day. Beijing’s manufacturing PMI was flat in June at an almost stalled 50.2, although the service sector was a little more positive with a rise to 53.8 from 53.2 in May. HSBC’s take on the matter was less encouraging, with the independent manufacturing PMI rising to 49.4 from 49.2 but remaining in contraction.

Australia’s manufacturing PMI means little these days for two reasons – there’s not much of a manufacturing sector left in this country and the monthly numbers are so volatile as to render this a meaningless series. There was excitement last month when the local PMI jumped into expansion at 52.4 but June saw a plunge to 44.2. No other developed country in the world sees PMI swings of such magnitude – not even close – surely bringing into question the survey process.

The good news for the Australian economy, on the other hand, was a 2.4% jump in building approvals in May for an annual rate of 17.6%, when economists had forecast a rise of 1.0%. It’s all about apartment blocks, nonetheless, as the Singaporisation of Sydney and other capitals continues a-pace. Apartment approvals surged 15.1% in the month alone while detached housing approvals fell 8.5%.

Never mind, foreigner buyers aren’t expected to value “the great Aussie dream”.

Dwelling prices jumped 2.1% in June for an annual rate of 9.8%, with most of the growth in Sydney. Approvals are a long-lead indicator and the faster they grow, the faster housing supply can catch up with demand. This should, in theory, weigh on prices down the track. But interest rates and foreign demand are the other driving factors.

The 56 point rally for the ASX200 yesterday took us back past the 5500 mark, having looked over the precipice at 5422 only on Monday. There is little for Australia to be concerned about vis a vis Greece, unless the whole financial world implodes, but no one expects that to happen. It is interesting, however, that we rallied yesterday despite another 5% drop in the Shanghai index to mark 22% for the ongoing correction.

Farcical

Last night the German and French stock indices each rallied 2% on the news that Alexis Tsipras had drafted a new proposal for Greece’s creditors to consider which included many concessions to the creditors’ earlier demands. This is it, the European markets assumed, Tsipras has buckled. There was even talk of the referendum being called off.

But when the finance ministers, who continue to be holed up in Brussels, took a look at the new proposal, they could not find anything different. Their frustration then turned to anger when Tsipras appeared on state television to again implore the Greek people to vote “no” on Sunday, suggesting a “no” vote would mean the creditors would be forced to bend to Athens’ will.

Incensed, the ministers arranged a quick phone hook-up and decided they would all pack up and go home for the weekend. They’ll wait until to Monday for the outcome of the referendum.

If this is Tsipras’ idea of political brinkmanship, then it would be more at home on Looney Tunes than in the halls of sovereign diplomacy. It’s now down to the Greek people, and the most recent polls have clouded the issue. Earlier in the week “yes” seemed way ahead, but now “no” is rapidly making a comeback.

We’ll all have to wait until Monday.

Wall Street

European stock markets had closed by the time the finance ministers were booking their flights. The positive mood had flowed over to New York early in the session, sending the Dow up 182 points from the open. On realising it was all just a farce, Wall Street drifted back, but domestic issues provided enough support to ensure a solid start to the second half nonetheless.

The ADP private sector report showed 237,000  new jobs being added in June, beating 225,000 forecasts. There is now talk of tonight’s non-farm payrolls number potentially surprising to the upside, maybe up to 290,000.

New vehicle sales posted another very strong month with Fiat-Chrysler leading the pack by a margin. It’s all about American car buyers not holding back. You bought a what?

A 0.8% increase in US construction spending in May took it to the highest level since October 2008, suggesting that after all this time construction spending has finally returned to pre-recession levels.

The only downer was the US manufacturing PMI, which fell to 53.6 from 54.0 to mark its lowest pace of growth since October 2013.

But overall the data were to the positive side, and the interesting thing here is Wall Street finished the day in the green despite the implications for Fed timing. But if early buying represented relief over Greece, tonight’s session (ahead of a long weekend and Greek referendum) might be interesting.

Currency and bond markets were more inclined to take Fed policy into account, with the dollar index rising 0.7% to 96.27 and the US ten-year bond yield rising 8 basis points to 2.42%.

Commodities

Similarly, the LME closed on a high note on the assumption Tsipras had conceded to doing a deal. Having been beaten down on Greek woes this past couple of weeks, short-covering rallies in base metals saw lead jump 1%, aluminium and zinc 2.5% and tin 4.5%. Copper moved a little higher but nickel fell slightly.

Iron ore fell another US40c to US$58.90/t.

It’s funny how the iron ore price and West Texas crude price continue to mimic each other, having fallen to 45 and bounced back to 60 pretty much in lockstep, despite having very little connection. Last night West Texas fell US$2.18 to US$56.88/bbl on higher than expected weekly US inventories, which underscores the realisation that despite a big drop in rig count, US oil production is actually on the increase again.

And the Saudis are pumping more than ever. Brent fell US$1.22 to US$62.03/bbl.

Gold fell US$4.30 to US$1168.30/oz on the stronger greenback.

The Aussie is down 0.7% to US$0.7648 on the stronger greenback.

Today

After yesterday’s strong opening gambit, the SPI Overnight closed down 3 points.

Australia’s May trade balance numbers are out today, following on from April’s shocker of a record deficit.

Tonight it's jobs numbers in the US, ahead of the Fourth of July long weekend. There will no doubt be much activity on the floor of the NYSE in the morning, and tumbleweeds in the afternoon.

Presumably we can stop talking about Greece now until Monday.
 

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article 3 months old

Second Half 2015 Outlook: Global And Local

By Greg Peel

Global Double Trouble

Russell Investments echoes the views of several market analysts in assuming global financial markets are currently at risk of volatility from two macro uncertainties – the timing of the first Fed rate hike and whatever becomes of Greece – but that any pullback in markets will provide investment opportunities.

On the Greek front, Standard & Poor's now puts the odds of a Greek exit of the eurozone at 50-50. One might be inclined to dismiss such a view as a disingenuous coin toss, but the truth is S&P had a Grexit at lower odds prior to last weekend.

The pervading view amongst global analysts looking on is that Greece will more likely remain in euro, some way, somehow. But there are plenty who are beginning to assume a Grexit is inevitable. The bottom line, nonetheless, is simply that no one knows. Were Sunday's Greek referendum to return a "yes" vote, implying acceptance of a bailout package's requisite reforms, but implicit of a vote to stay in the euro, then one assumes a deal could indeed be reached with a new Greek negotiating team. A "no" vote would simply be inconclusive, but would probably lift S&P's odds of a Grexit to beyond even money.

Russell Investments was backing Greece to remain in the eurozone when it published a third quarter outlook last week. The analysts also expect the Fed will move in September, but acknowledge a deal of uncertainty surrounding both calls. Uncertainty is the enemy of markets, and thus a source of volatility.

From a global economic perspective, Russell is still assuming the September quarter will see moderate growth for the US, the recovery in Europe becoming more entrenched, and improvement from Japan. Emerging market economies will nevertheless remain under pressure, and Russell sees the Chinese slowdown as having further to run.

While 2.5-3.0% growth is expected for the US in the second half of 2015, supported by robust single-digit corporate earnings growth, the expensive US stock market and low bond yields mean investors need to be cautious heading into the Fed rate rise. Greece may upset Europe's recovery path, but Russell would look to any pullback as a buying opportunity.

In the Asian region, Russell notes the Chinese, Australian and New Zealand economies continue to slow, but that policy accommodation makes deep downturns unlikely. Japan remains the pick of the region.

Deutsche Bank, too, is expecting the Fed to move in September. Deutsche's economists see the global economy posting slightly lower growth in 2015 than the already below-trend pace of 2014, before rising slightly to above trend in 2016 at 3.8%. The US appears to have overcome its weak first quarter and Deutsche believes growth in most major regions will pick up significantly, with the exception of Asia ex-Japan.

The analysts suggest the risk of another 50-100 basis point jump in longer term US bond yields once the Fed has made its first move is manageable, given implicit forward momentum in the US economy and resultant support of risk assets. However the analysts won't rule out a sudden panic jump in rates due to current low liquidity in bond markets, and a subsequent spill-over into risk asset volatility. This would only occur if the Fed were forced to keep raising faster than it would like due to inflationary pressures, and is unlikely in Deutsche's view.

China tends to be relatively less sensitive to developments in US financial markets and here Deutsche sees monetary and fiscal easing, and emerging signs of stability in China's property market, as supporting modest growth in the second half.

Were the referendum in Greece to prove the catalyst for heightened uncertainty and nervousness, Citi would expect a rush into US, German and UK bonds and strength for the US dollar, pound and probably yen. Gold might find support and equities could pull back further.  But a survey conducted by Citi has found most equity investors are not that worried about Greece and the potential for global disruption.

Most would see further pullbacks as a buying opportunity.

Australia

The rally experienced on the ASX in the March quarter thanks to a falling Aussie and the global demand for yield now seems but a distant memory, admits Morgan Stanley. Since the broker asked the question back in April whether the old "Sell in May" adage might play out in 2015, the ASX200 has fallen over 8%.

"Sell in May" might be dismissed by some as mere folklore but Morgan Stanley's analysis back to 1937 for the All Ordinaries does confirm June as the second worst month on average after September, with December being the best (thanks Santa).

Morgan Stanley believes Australia's macro outlook remains challenging as the domestic economy struggles with its transition due to lower commodity prices and labour cost pressure. The growth outlook for developed markets in general has been improving but a patient Fed has kept the Aussie dollar higher than warranted, constraining domestic growth and earnings. The analysts expect Greece and a slowing China will weigh on consumer and business sentiment in the short term, supporting Morgan Stanley's below-consensus forecasts for growth and employment.

The ASX200 is currently trading on a one-year forward PE of 15.2x compared to the long run average of 14.1x, suggesting the index offers 7% further downside to around 5000. Earnings upgrades are required to support such a PE and they rely heavily on cyclical improvement, hence Morgan Stanley believes the Australian market remains more vulnerable than those of developed market counterparts.

Morgan Stanley would not be surprised if 5000 is tested, before a recovery towards the broker's 5650 target for mid-2016.

On the subject of corporate earnings, Macquarie notes the last few weeks (known as the "confession session" ahead of year-end books close) have seen a number of high profile downgrades, with the likes of Woolworths ((WOW)), Seek ((SEK)), Flight Centre ((FLT)), Qube Holdings ((QUB)), Nine Entertainment ((NEC)) and Virtus Health ((VRT)) all cutting FY15 and/or FY16 guidance. The broker believes, nonetheless, that while conditions remain challenging generally these downgrades are more company specific and/or structural than implicit of macro issues.

The broker also notes forecast earnings growth for the market ex resources remains relatively unchanged, with 6.5% expected for FY15 (FY14 saw 5.2%) and 7.8% expected for FY16. After the February result season, these numbers were 6.3% and 8.0%.

The ratio of earnings upgrades to downgrades was showing positive momentum in April-May and has pulled back somewhat in June, but the ratio remains above the lows of twelve months ago, Macquarie points out. The broker has identified a group of stocks for which revision ratios have been positive yet stock prices have underperformed. The group includes Oil Search ((OSH)), Mirvac Group ((MGR)), CSR ((CSR)), Fairfax Media ((FXJ)), Navitas ((NVT)), Fletcher Building ((FBU)) and Transfield Services ((TSE)).

Conversely, the group that has seen negative revisions yet share price outperformance includes ALS ((ALQ)), Tabcorp ((TAH)), Orica ((ORI)), Austal ((ASB)), Ainsworth Gaming ((AGI)), Steadfast ((SDF)), Mantra Group ((MTR)) and SAI Global ((SAI)).

UBS notes the sell-off on the ASX in the June quarter was led by the banks and consumer staples, while rallies for consumer discretionary and REITs provided some offset. The ASX200 PE has fallen back year to date, but this principally due to resources.

UBS expects global interest rates to push higher in the second half of 2015 but does not expect a panic sell-off in bonds. Global and Australian stock markets should be able to cope with a moderate rise in yields over the next six to twelve months and the Aussie still has downside potential, UBS believes, which should offer earnings support for corporates.

UBS' ASX200 target for end-2015 has been pulled back to 5800 from 5900 due to risks surrounding bank capital requirements and risk for the iron ore price. The broker still sees mid-single digit earnings growth in FY16, in line with consensus forecasts.

UBS is underweight mining, REITs, telcos, consumer staples and general insurance, and overweight US dollar earners, housing construction plays and energy. The broker is neutral on the banks.

UBS' favoured stocks include Asciano ((AIO)), Challenger ((CGF)), CSL ((CSL)), Harvey Norman ((HVN)), Incitec Pivot ((IPL)), Origin Energy ((ORG)), Qantas ((QAN)), QBE Insurance ((QBE)) and Sonic Health Care ((SHL)).

Housing

Credit Suisse agrees with UBS on the housing construction front. The broker notes Australian house prices rose at a 7% annual pace in the March quarter, down from 11% in the December quarter but still strong given a weakening economic backdrop and anaemic income growth.

While tight supply and low mortgage rates have been obvious drivers, so too has demand from Chinese buyers, Credit Suisse notes. In FY14, Chinese buying grew by 60% on FY13, the broker estimates, and Chinese demand represents 15% of national housing supply. City preference is split from Sydney (23%) to less than 6% in Perth, Adelaide and Hobart.

Sydney has not been signalled out for Chinese attention globally, with Melbourne, Auckland, Hong Kong, Singapore, London, San Francisco and Vancouver all proving popular, making these cities some of the most expensive in the world.

Australia sits at the doorstop of the greatest wealth creation in history, Credit Suisse notes, which is why Chinese demand for Aussie housing is unlikely to abate. The broker suggests a number of local companies should continue to benefit from this longer term theme, including developers, building material producers and property websites, and has now added Boral ((BLD)) to its preferred portfolio.

Commodities

When will it be time to risk investment in commodities once more? Deutsche Bank believes lows in commodity prices should be hit during the second half before tightening fundamentals and higher prices begin to emerge in some markets in 2016.

Chinese monetary and fiscal measures are set to improve the outlook for industrial metals going forward, Deutsche suggests. The broker has a preference for nickel, zinc and palladium. Producer cuts will nevertheless be required to reduce oversupply of iron ore and coal.

The outlook for gold is not so rosy, in the face of expected Fed rate increases and subsequent rises in US yields and the greenback. There is no evidence investors are positioned in gold in case of a negative outcome for Greece, the broker notes.

Nor does Deutsche expect the sharp decline in US shale drilling activity to promote any tightening in energy markets. Not only are productivity increases offsetting the impact, production looks to be accelerating into the second half. Assuming OPEC continues to dismiss the notion of production cuts, the global oil balance should tilt to oversupply in 2016, the broker suggests.
 

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article 3 months old

Is Our Preoccupation With Greece Blindsiding A Bigger Worry Of China?

By Peter Switzer, Switzer Super Report

With all of this preoccupation with Greece, its failed debt negotiations and the drama of the out-of-the-blue referendum idea that the creditors rejected, the question I have is:

Are we ignoring a potentially scarier problem for our stock market — China?

Last week the 4% plus spike of the German Dax stock market index, following the expectation that the new Greek proposals for debt repayment would get a thumbs up from its creditors, [confirmed] the bad news over the weekend for the Greeks [would] play out badly in stock markets this week.

Uncertainty around what a default means on [today] and its implications for the Eurozone, as well as the big three creditors that are owed most of the 320 billion euros — the European Central Bank, the European Commission and the International Monetary Fund — will be potential market-rocking issues for stocks.

I guess it has to be what goes up can come down, but it will take most of the week to see how scared financial markets are about the failure of an economy that is only 0.3% of world GDP and 2% of the Eurozone GDP.

Undoubtedly hedge funds, short-sellers and speculators will exploit the uncertainty but I suspect the fallout won't affect the general positive view for stocks for 2015, despite some likely worrying moments at least for this week.

I damn well hope the lenders who have played hardball with the Greeks are prepared for the market ructions for the week ahead. The ECB in particular should have worked out a "what if the Greeks screw this up" plan B.

China problems

That aside, in case you missed it, the Shanghai Composite plunged 7% on Friday and gave up 9% over the week. It lost 13% the week before. All of this has to be put into context, and the first thing you need to know is that the Chinese stock market was one of the world's worst performers for about six years. However its domestic A-share market then surged about 150% in a remarkably short period of time and the rise this year has been around 30%.

Yep, 150%, so do you think a retracement is way overdue? I'd say so.

Some experts say the forward P/E ratio is not too overvalued but still, that rise has to be a worry.

Stewart Richardson, the chief investment officer at RMG Wealth Management warned us on CNBC about Chinese stocks. "We're cautious on Chinese equities, which we think is a bubble, which is bursting real-time here," he said. He says a 50% fall is on the cards, blaming the recent slowdown in growth and poor corporate profit stories.

Adding to the dodgy picture, the Chinese stock market is often compared to a casino with retail speculators using margin loans to leverage up their returns.

It's a big reason why I don't advocate playing Chinese stocks as I simply don't understand what's going on.

A bubble?

The Washington Post recently looked at why the Chinese market looks like a bubble and why it might burst, arguing that it could have global consequences.

First, the Post explained that: "In 12 months, the Chinese stock markets rose enough to create $6.5trillion of value. That's the equivalent of around 70% of China's GDP in 2013, or about 40% of the total value of the New York Stock Exchange – or enough to pay off Greece's debt 20 times over."

Second, inexperienced Chinese investors are trying their hand at stocks and they could be up for a big sucker punch.

Third, Bloomberg says "the market has experienced bigger swings over the past 30 days than any other market except Greece."

Fourth, the slowdown in Chinese economic growth could not come at a worse time, though I would argue 7% growth on a bigger economy could be exaggerating how bad this slower growth is. That said, if growth slows into the 6% band, it could spook stock players.

Finally, excessive lending has fuelled this stock market surge with The Washington Post pointing out that "a measure of the amount of money sloshing around the economy – was $20 trillion at the end of 2014, an incredible 70% larger than in the US." Adding to the worrying picture has been an explosion of margin loans to buy shares and this has tripled in the past year.
 


The home game

One reason not to be too spooked by the Chinese market's big ups and downs is the fact that only about 7% of individuals in China actually trade stocks. So a market crash would have limited effects on overall consumption and the economy, despite a big number of wealthy Chinese doing a lot less shopping in luxury brand shops. Ouch!

Another reason I am relaxed about China is that Wall Street's main reports on why stocks were mixed on Friday ignored China and in fact the Dow put on 56 points to close at 17,946.68 despite that big market fall. Of course, the experts who play the NYSE and the Nasdaq are not infallible, but I reckon these big Chinese market falls would have attracted a comment or two, and a sell-off or two, even with all of the Greek antics dominating the headlines.

Finally, I never underestimate the Chinese Government's ability to manipulate its economy and markets, though I will be watching this latest Chinese market drama play out and will keep you informed, as you would expect.

So in summary, Greece should be the main market game this week but a good jobs number out of the US on Friday could even keep this in perspective. Never underestimate the Yanks' ability to ignore problems outside its borders. I will put China concerns on the shelf for this week but with a moderate watch on them.
 

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

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article 3 months old

The Overnight Report: Stabilising

By Greg Peel

The Dow closed up 23 points or 0.1% while the S&P gained 0.3% to 2063 and the Nasdaq rose 0.6%.

Rollercoaster

Yesterday’s volatile trade on Bridge Street was basically a tale of two cities – Athens and Shanghai – or for all you Leaguies, a game played in two halves.

On Monday night stock markets in Europe had tanked on the news from Greece and Wall Street followed suit with a 2% fall. The ASX200 promptly fell 32 points from the open and it looked like we might be in for another shocker, but for the fact we’d already had our 2% fall in Monday’s session.

That fall arguably led itself more to China, Australia’s most critical trading partner, than to Greece, less than 1% of trade, or even Europe in general. So ahead of the Shanghai Exchange opening late morning Sydney time, why were we selling again?

Within half an hour the cavalry had arrived and the ASX200 began rapidly recovering, all the way to a 20 point gain by mid-morning. Then the Shanghai market opened, and promptly fell 5%. The ASX200 turned and fell to be down around 10 points. Shanghai then began to recover, and thus so did we. As momentum built to the upside in China, the ASX200 closed up 36 points, and closed the financial year, and everyone hit the showers.

Shanghai continued to rise to a 5.5% closing gain. This is the sort of result the world might have expected on Monday after Beijing’s rate cut, but it took an extra day for the Chinese market to bottom out below the 20% correction mark.

On the ASX, sector gains were relatively consistent at 0.5-1.5% other than tiny info tech and that enigma utilities, which closed flat. Given all the ex-divs on Friday, there’s probably not a great incentive to rush into utilities right now with a Fed rate rise looming.

No one is paying a lot of attention to domestic issues at present but yesterday’s private sector credit numbers for May indicated investor loan growth for housing may have now peaked, thanks to APRA’s clampdown. Overall credit rose 0.5% in May to be up 6.2% year on year. Investor loans grew 0.8% for 10.4% annual growth, but APRA restrictions in theory cap this growth rate at 10%, suggesting further growth is limited.

The good news is business loans grew 0.4% for 5.2% annual, continuing a gradually rising trend.

Underscoring a potential peak in the investor housing bubble are yesterday’s new home sale numbers for May, which showed an overall fall of 2.3% after four months of gains. However apartment sales continue to fire along, and that’s where the investors are mostly playing.

Greece

As I write, Greece’s bailout package has expired and the IMF repayment has not been made. Last night the Greek drama took a somewhat theatrical twist.

Ahead of expiry, Tsipras took what was basically his same proposed package back to the eurozone finance ministers and requested Greece be granted a two-year bailout extension. The ministers had already rejected the same package last week, so why on earth did Tsipras think the creditors would suddenly change their minds?

Because the creditors desperately want Greece to remain in the eurozone, as is evident by various leaders’ indirect appeals to the Greek people. If they’re so desperate, thought Tsipras, then at five minutes to midnight they must be ready to buckle.

They weren’t, of course. In the lead-up to Sunday’s referendum, we have the bizarre situation of Tsipras pleading with his people to vote “no” (we will not accept the creditors’ conditions) because then the creditors will simply have to buckle to keep Greece in the eurozone. Meanwhile, European leaders are pleading for a “yes” vote so that Greece can stay in the eurozone.

As it stands so far, “yes” is still winning in the polls, and last night’s “yes” vote rally in Athens saw greater numbers than Monday night’s “no” rally. While there will be more proposals and finance minister meetings between now and Sunday, Angela Merkel has said that no decisions will be made until after the referendum.

Presumably she’s banking on a “yes” result.

Wall Street

Having been thumped on Monday night, European stock markets traded lower again last night. Wall Street opened higher, over 100 points up for the Dow, but succumbed to the European influence to be flat by midday. Europe then closed and the Dow rallied back 100 points again, only to fade away to the final bell.

Being the end of quarter, and end of half year, late trading cannot be taken as particularly indicative. Tonight will tell more of a tale.

Both the Dow and S&P500 closed the first quarter in the red after nine consecutive quarters in the green. The broad market S&P – the “real” Wall Street index – closed up 0.2% for the first half of 2015. The Dow is down 1.1%.

Greece, China and of course, Puerto Rico still drove uncertainty last night but there is still a domestic story playing out underneath. The Case-Shiller 20-city house price index showed another gain in April, but the pace of growth continues to slow. The Chicago PMI improved, but remains under 50. On the other hand, the Conference Board’s monthly consumer confidence index jumped in June and beat forecasts.

At some point the global dust will settle and we’ll return to the more familiar but no less tiresome task of trying to second-guess the Fed.

To that end, the US dollar index jumped 0.7% to 95.56 last night as the euro traded lower, while the US ten-year bond yield remained steady at 2.34%.

Commodities

The jump in the greenback did not help commodity prices in this uncertain time. On the LME, aluminium, copper, lead and zinc all traded 0.5-1.5% lower while tin fell 3%. Having crashed 5% on Monday night, nickel recovered 2%.

Iron ore fell US$1.20 to US$59.30/t.

The oils may have come under pressure as well, except that nuclear negotiations between Iran and the West could not reach a conclusion and thus the deadline has been extended. No Iranian oil to flow just yet. West Texas rose US83c to US$59.06/bbl and Brent rose US$1.21 to US$63.25/bbl.

Gold fell back US$7.50 to US$1172.60 but despite the rally in the greenback, the Aussie dollar is up 0.3% at US$0.7705.

Today

The SPI Overnight closed down 31 points or 0.6%. Not sure what the futures market is anticipating there.

It’s the first of the month, so that means global manufacturing PMI releases today, including for Australia and China, both official and HSBC. Australia will also see house price, building approval and inflation numbers.

Tonight in the US the private sector jobs numbers for June are released, ahead of tomorrow night’s non-farm payroll data.

Happy New Year.

Rudi will appear twice on Sky Business today (and none tomorrow). First on Market Moves, 5.30-6pm, then later he will host Your Money, Your Call Equities.

Tomorrow he will present at Invast offices in Sydney.


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article 3 months old

The Overnight Report: Global Turmoil

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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