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The month of July is shaping up to be among the most volatile months.
Not only is the Greece saga dragging into the month, we have US Q2 corporate earnings, FOMC, and China Q2 GDP thrown into the mix.
The US VIX surged by 35% to 18.85, the highest in five months, on Monday after Greece’s call for a referendum caught the market by surprise. It has since fallen back to around 16, which I feel is the calm before the storm.
In other words, we expect to see volatility picked up again soon, especially if the Greek public sides with PM Tsipras and votes ‘No’.
European equities are now trading in a wider range, which is a little uncharacteristic of their typically stoic moves. Based on a flimsy news flow of a leaked letter from the Greek PM to the troika, which he promised to accept the conditions, with just a few amendments, European stocks shot higher.
DAX added more than 2%, CAC almost gained 2%, and FTSE 100 was higher by 1.4%. In the bond space, German bunds were sold off, with the 10-year yield rising by 5bps. Perhaps only euro is a little more rational, inching lower for the second consecutive session on Wednesday. However, the EUR/USD may face good support around the 1.10 mark.
China doing more to support equities
While the news media were blaring Greece headlines constantly, I feel that China also deserve some attention. The recent rate cuts appeared to be rather useless against arresting the sharp pullback in Chinese equities, so much that they resumed its decline yesterday after a false bounce on Tuesday.
The ferocity of the sellers forced the authorities’ hand. China announced more initiatives to support the stock markets, which includes accelerating the introduction of new margin-trading rules and cutting stock-transaction fees. The Shanghai and Shenzhen stock exchanges will reduce fees by 30%, effective from August.
What was more significant, and probably has more of a direct impact is the CSRC’ decision to allow ‘reasonable rollover’ in margin trading. Brokerages are no longer required to force-liquidate clients’ stock holdings if they have insufficient collateral.
The margin rollover will likely help reduce the pace of margin calls, and also cushion the decline of outstanding margin debt. Margin lending in China fell for the seventh-straight day from the peak on 18 June, tumbling almost 10%, or about CNY 220 billion ($36 billion).
Chinese stock index futures reacted well to the overnight news. The SGX FTSE China A50 Futures rallied over 3% in early Asia. We should see a similar positive reaction in the onshore markets, although given the highly uncertain nature of Chinese investors, foreign traders may want to exercise caution.