Market optimism wanes as Greek woes remain

The solid rally in the ASX 200 and the Nikkei 225 still somewhat appeared strained, and the change in sentiment during late Asia confirmed the restraint. 

Oil rig
Source: Bloomberg

Caution reasserted itself in this afternoon, as investors were hit with the realisation that the agreement still needs to be approved in the Greek parliament to set the stage for formal negotiations.

This is when things can get trickier. There is a belief that PM Tsipras may hobble along the process, as the harsh reforms agreed upon are expected to put him against his ‘anti-austerity’ party. Many think that he needs to rely on opposition support to legislate the deep economic reforms and asset sales measures by Wednesday’s deadline, or face a forced exit.

Further to that, should Mr Tsipras survive Wednesday, he will need to begin discussions on a bridge financing deal to tide the debt-ridden country until the bailout monies are disbursed. This could be another round of tough talks, with Finnish Finance Minister Alex Stubb expecting ‘very difficult negotiations’ and saying that ‘he has no mandate to give unconditional money’. By all means, the Greek saga is here to stay for a while longer.

European equities started Tuesday on a softer footing. FTSE and CAC were trading near flat, while DAX edged mildly lower. Euro on the other hand recovered, with EUR/USD rebounding above $1.10 in early European trade.

China blue-chips struggle

Larger A-shares continued to struggle on Tuesday, while smaller cap extended the recovery seen on Monday. The China A50 and CSI 300 indices ended 3.5% and 2.4% lower, while the ChiNext index advanced 1.6%, which also helped Shenzhen Composite (SZCOMP) closed up for the fourth-consecutive session. The SZCOMP had rebounded 14% over the last four sessions, climbing well over the 2000 points from over three-month lows. It seemed that the 200-day moving average at 1836 is proving to be a strong support for the index.

The Shanghai Composite is showing the same trend, with the index keeping close to the 4000-handle, well-supported by the 200-day moving average at 3454. Of particular significance was the falling volatility in the Chinese equities, which was mostly a function of the government’s actions.

I am still of the view that we could see a period of consolidation over the next few weeks, as authorities gradually unwind the harsh support measures. Furthermore, China will need to repair the negative perception of the state intervention in the stock markets for the first-two weeks of July. It is a paramount that Beijing is able to reassure institutional investors that they will continue to implement market liberalisation steps and welcome increased foreign participation.

Perhaps coming at an opportune timing, Blackrock came out to say that stabilising fundamentals are expected to push A-shares higher, according to Bloomberg. The fund manager added that the huge stock market losses are not likely to have an economic impact and should not affect MSCI’s decision on index inclusion.

Traders will now focus on tomorrow’s Q2 GDP where the market is looking for a 6.8% reading. The economist estimates ranged from 6.5% to 7.4%. If the actual figure is bang on target, then it will be the first time in post-GFC that a sub-7% quarterly growth is printed (last time was in Q1 2009 at 6.2%).

Oil under pressure

Crude prices were dragged lower after Iran and the six major powers agreed to a nuclear deal, which saw some sanctions lifted in exchange. Market anticipated that this could mean that Iranian oil is going to be back into the market, and exacerbating an over-supply problem. Despite views that this is unlikely to take place for a few years as Iran will need to make infrastructure investment to return to the global oil market, investors sold crude futures. WTI and Brent fell over 1%, hovering around $51 and $57 respectively.

I feel that oil prices are likely to stay at current levels in the near term, as the supply glut is not expected to significantly ease in the coming months. OPEC reported an increase in its oil production, to an average of 31.4 million bpd in June, although it raised its 2015 forecast for oil demand.

The cartel also said that oil supply from non-OPEC nations had increased this year and should continue to grow. In contrast, the IEA reported that softer oil prices and cuts in expenditure will weigh on non-OPEC countries’ production.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.