China and Greece dominate the conversation once again

On a day like today it’s hard to know where to even start writing a market wrap, such are the trends and news flow.

Source: Bloomberg

Greece and China dominate once again, but throw in massive falls in bulk and base metals and you are left with a worrying mix for market participants. Can the Federal Reserve divert attention away from these issues in today’s FOMC minutes? I am sceptical, even though it is actually the most important US economic release, given the Fed use it as their key communication vehicle.

Still, for traders there are only two games in town and these remain China’s equity markets and the Greek negotiations.

Our European opening calls are actually looking quite favourable for the bulls, although we have seen better selling coming in as Asian markets have been sold off heavily. We also know that Greece is headed for what could be the last two ‘key’ meetings.  This Thursday we know the Greeks need to submit a set of ‘comprehensive proposals’ to the creditors. However, they also need to detail a list of ‘prior actions’ that also need to be voted through the parliament. Presumably, once (or if) these factors have been passed, we can see a realistic chance of receiving funds from the European Stability Mechanism (ESM). Sources in France have even outlined a number of steps that are likely to be put forward.

Of course, if nothing is decided on Sunday then for a third Monday morning in a row we face gapping risk in markets, although this time we will be facing rhetoric around how the rest of Europe are preparing for ‘Grexit’, as well as humanitarian aid. With everyone in the market raising the probability of a ‘Grexit’ this year, I am going to go the other way and suggest that we are going to see a resolution which will be signed off on Sunday, if for no other reason than commentary from Merkel, Tusk and Juncker has been outright pessimistic. They were all outright optimistic going into the weekend referendum.

It seems ironic then that the song ‘Final Countdown’ was from a band called ‘Europe’.

Chinese equity markets though are really what anyone in Asia is talking about. We’ve seen some crazy days, but today must be their equivalent to a ‘Black Wednesday’, or words to that effect and, for the first time, the CSRC (regulator) has admitted there is genuine ‘panic selling’ underway. Of course, this is tongue in cheek, but when we see around 90% of the market suspended or falling by their daily limit (while further measures have been taken to limit the influence seemingly exerted by futures traders) you know things are becoming less rational. When a regulatory body targets short sellers as a key reason behind falls in markets, that’s usually a red flag of desperation, but I think in this vein the short sellers are also a tidy scapegoat.

We have even seen the State Asset Administrator telling state-owned firms to buy their own stock to stabilise share prices. In theory, if you close over 50% of stocks and nationalise others you should see a higher equity market!

There is a two-way battle underway between strong deleveraging from market players and moves from authorities to stabilise the market - many of these extremely unconventional. One just has to look at the fact that every rally is pounced on by traders trying to offload stock to believe that for now the path of least resistance is lower. However, if there is one thing we have learnt from the GFC it is that trends need to be respected and picking bottoms is not going to lead to increased probabilities, although it will elevate you to ‘hero’ status from certain novice traders.

As an individual living in Australia, the natural question is whether we see the impact of the falling stock market on the real economy. There is no denying the downside moves we are seeing in copper, nickel and iron ore will have an impact but we have for the first time seen real selling coming into the ASX 200 on Chinese stock weakness, although the sizeable falls in the Nikkei and Hang Seng are also hurting local sentiment. Japan is certainly at an interesting juncture and looks destined to close below 20,000.

I still feel we are a long way from the equity falls having a material impact on economics. Predomintely because only 20% of the Chinese household portfolio is in equities, but had the falls been in deposits then things would look a lot worse. Still, it does feel that moves in Chinese equities are having a bigger impact of regional sentiment than they did say a week ago or so. Absolutely one to watch.

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