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Markets upbeat on Greek hopes

Overnight markets were upbeat about prospects of a Greek deal this week and ahead of the repayment deadline on Tuesday 30 June.

Greek national flags fly from buildings around a public square in Athens
Source: Bloomberg

European equities soared well over 3%, accompanied by moderate gains in US shares later on.

We could see a tentative agreement hammered out as early as Wednesday when the Euro-area finance ministers convened another meeting ahead of a scheduled summit of European Union leaders.

The pace of negotiations is expected to step up over the next two days so that a deal can be signed off at the end of the week. The new Greek proposal was fairly well-received by European leaders, but it is still not enough to reach a consensus.

German Chancellor, Angela Merkel, said the set of reform measures is a step forward, but it is still not yet where everyone needs to be.

Although this is a significant development over the five-month long gridlock, Greek PM Tsipras still needs the support of parliament in Athens even if he reaches a tentative accord with the European leaders. So we could potentially see another roadblock given that the Greek parliament is dominated by the anti-austerity Syriza coalition.

Nonetheless, the positive leads from the overnight session should carry over to Asia. Regional index futures signal that Asian markets may receive a boost from the good news out of Greece.

Margin is the buzzword for China

China markets returned from a holiday and it will be interesting to see if the Greek optimism would help cushion Chinese equities, which collapsed 13% last week. The keyword will be margin.

Margin traders have been an important driver of Chinese shares, and ongoing regulatory efforts to curb the use of leverage are likely to weigh on the market. The outstanding level of margin debt on the Shanghai Stock Exchange fell for the first time, in nearly a month, to CNY 1.479 trillion (USD 238 billion) last Friday.

Last week’s rout took out USD 1.3 trillion from the mainland Chinese shares, which is more than the value of the Australia’s stock market. Nonetheless, Chinese equities remained one of the top performers year-to-date, although if the decline in margin debt gains momentum, we could see its ranking drop pretty fast. Meanwhile, CICC estimated that CNY 1.9 trillion (USD 300 billion) will return to Chinese markets today. Over USD 700 billion of locked up IPO funds should flow back into Chinese equities this week.

However, I still hold the view that Beijing is unlikely to allow a rapid slide in the domestic stock markets, just like it is uncomfortable with too fast a climb. What this means is that we could see measures, possibly in the form of more monetary easing, to cushion the equity market should the selloff step up. What is almost certain is that tighter margin lending rules is here to stay.

Meanwhile, China flash PMI reading will be important. The market is looking for a slight improvement in the June number at 49.4 from 49.2 previously. This is however still below the key 50 number. Based on HSBC PMI, China’s manufacturing activity had contracted (below 50) for most of this year. Japan manufacturing data, Australia housing prices and Singapore’s inflation figures will also be due.

Ahead of the Singapore open

The Straits Times Index once again confirmed the key support level at 3300, keeping well within the consolidative range of 3300-3350. The 200-day moving average continues to pose as a formidable resistance at 3360.91. The Index has been trading below the 200DMA, since its sharp fall through 3400 at the start of this month.

The mid-term indicators are still pointing towards the downside. The MACD line on a weekly period is not only under the signal line but also dipped below the zero line. This means that the underlying momentum has turned bearish. On that note, more positive developments out from Greece may help boost local sentiments. The converse will be true, and should Greece fail to secure a deal by the end of the week, the 3300 support level may lose its resilience.

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