Calmer seas return

Jitters over Greece and China are subsiding as the latest developments point towards an improvement in the respective situations. We may now see focus switching back to central bank divergence, specifically on the US.

China data board
Source: Bloomberg

The VIX continued to retreat, pulling back below 14 from an over five-month high of 20, just three sessions ago. Bonds remained under pressure, with yields in 10-year US treasuries and German bunds inching off recent highs.

Pirates of the Mediterranean

The European leaders managed to submit Greece to a deal on late Monday, where the measures are seen as more austere than previous conditions. Whether Greece has walked the plank to an economic and political collapse is still unknown, but the agreement is quite unexpected given PM Tsipras’ vehement defiance for more austerity.

Many analysts expect this deal to cause PM Tsipras much political capital and could see a high chance for a new election within the next few months. While the agreement is definitely very positive for market sentiments, as the prospects of Grexit have significantly reduced, this does not mean the odds are eliminated in the medium term.

Firstly, Greek lawmakers still need to pass the measures agreed upon into legislation. Secondly, political instability may surface if Tsipras loses his majority and a unity government is required. We would see a difficult road ahead. For now, calmer waters.

Chinese armada patrols the seas

More suspended stocks are expected to return to the fold, with over 250 A-shares to resume trading today, according to Cninfo.com.cn, the CSRC’s website for information disclosure. The acid test on the success of government measures to halt the slide can take place when the domestic stock market is back to full strength.

Even then, the various support measures will still need to be pulled, to determine if the equity markets can function without distortion. Still, the dominance of retail traders makes the markets vulnerable to wild swings

Tellingly, the China Security Journal commented that China should encourage more institutional investors to enter the market. This is my view, although the recent episode of hard-handed approach may give such large investors some pause.

If we recall, when MSCI rejected the inclusion of A-shares into in indices on 10 June, the firm highlighted capital mobility as a major hurdle. China’s directive to restrain major shareholders from selling their stock holdings for six months may indirectly affect capital mobility. Granted, domestic funds form the bulk of the major shareholders (more than 5% of a stock), which means the restrictions are mostly applied to them.

Nonetheless, it does not take away the concern that the Chinese government may apply such market-unfriendly measures when there are more foreign institutional investors in the domestic markets.

A rising tide should lift Asia

Market participants in Japan and Australia continued to buy into risky assets. The Nikkei rallied well above 20,000, eyeing 20,500 at the time of writing. Likewise, the ASX 200 bounced above 5,500 in early Asia.

Singapore’s Q2 GDP contracted more than expected at -4.6% quarter-on-quarter, the deepest since 2012, as shrinking manufacturing activity led the decline. This kept the pressure on the SGD, which was weakened on a broad-based rally in the greenback. We could see some weakness in the Singapore stock market, but the prevalent risk-on mood in the region should keep it supported.

As always, we continue to monitor the Chinese stock markets. In particular, the A50 index may see more attention after falling over 1% on Monday despite gains in other Chinese indices, including a 2.6% rise in CSI300.

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