Asian markets were unable to escape the risk aversion, with equity performance from Australia and Japan to China and Hong Kong swimming in red.
China no doubt suffered the most. Domestic markets continued to be beaten down, enduring large intraday swings, as Beijing struggled to soothe frayed sentiments. Notwithstanding several market-friendly measures, which would have worked in the recent past, the ferociousness of the stock market’s fall was a clear signal to the authorities that any perceived control over market sentiment is pure fantasy. They might be learning it the hard way now, especially if the disorderly market conduct continues to persist, which we think is very likely.
However, I feel it may be premature to dismiss the government initiatives. Policies take time to work their way through the system before sentiments can be more permanently altered. For now, the mood is verging on panic. It is extremely hard to calm a bear who is in a rage – not impossible, but tough.
Some of the latest measures seem to be decent. The explicit permission given to brokerages to rollover margin debt is one, which in theory should help to slow the closure of margin loans. The fact it did not, at least not immediately, suggests the Chinese brokers are more concerned with managing risks. However, the problem is that, as the Chinese markets go further south, more margin calls will be issued until the brokers decide the risk has fallen to a level they are comfortable with. In the meantime, I expect Chinese stocks to remain under pressure.
Turning to Europe, Greece will remain on the radar of many traders. Adding to the shivers are polls showing the outcome of Sunday’s referendum is too close to call. According to a GPO poll of 1000 people cited by euro2day.gr, 47% says ‘yes’ while 43% are in the ‘no’ camp. While Greek PM Tsipras is advocating a ‘no’ vote, he has stated that he will respect the wishes of the people if the outcome is a ‘yes’, while his finance chief Yanis Varoufakis said he will resign if the public does not side with them. Grexit remains a real possibility and, with several commercial debt repayments coming up over the next week or so, a clear Greek default (instead of being ‘in arrears’) is on the horizon.
Meanwhile, spillover risks from international developments may have muddied the backdrop for the Fed to hike rates. While the US non-farm payrolls remained above 200,000, the sharp drop in the size of the labour force distorted the unemployment rate, which fell to over a seven-year low of 5.3%. Additionally, wage growth stayed stagnant. The job market still looks fairly solid but wage growth is still weak and a risk for lift-off expectations.