Greece and China to dominate headlines

The outperformance in the US last week was driven by the Federal Reserve, who provided traders with the most market-friendly outcome from last weeks’ FOMC meeting when the dust had cleared.

Source: Bloomberg

By maintaining their growth and inflation forecasts for the years ahead at the same time as reducing their projections for the fed funds rate (for the corresponding period in time), the Fed are looking for less aggressive tightening from an ever-improving economy. This should effectively allow the US economy to reach its full potential (or ‘escape velocity’), while providing less of a headwind for equities and emerging market economies.

Whether that goodwill dissipates this week is yet to be seen, but S&P futures have opened on a stronger note and, if Eurostoxx futures were open now, they would be higher too. 71% of all open positions held by IG clients are long DAX right now and this is a brave call given Greece is all anyone is talking about today. Although, if the Chinese markets weren’t closed for the Dragon Boat Day, I am sure they would command centre place too.

Outside of US futures there is little bullish sentiment around. The ASX 200 continues to question if price should push into a new range of 5600 to 5400, shown clearly in four-hour charts where price has firmly rejected the 50% retracement of the May-to-June selloff at 5,614, with the various oscillators highlighting a potential reversal. After a short-term move higher since 9 June, the bulls really need to see 5,614 break for last week’s ASX outperformance to continue.

EUR/USD has pushed modestly higher in Asia and continues to eye the 16 May high of $1.1467. Recall, it was near this level that Benoit Coeure (an executive board member of the European Central Bank) detailed that the central bank may front load its asset purchases, causing the EUR to plummet. This is therefore a key market point for traders and whether the pair can break this level hinges on news over the next 24 hours.

So far we have heard constructive narrative of a new Greek proposal, with a number of new measures being effectively leaked through various newswires. We have even heard from the French camp that the proposal may form the basis of an agreement which the EU finance ministers can accept and use in the upcoming head of state summit. Even Jean-Claude Juncker’s aides have suggested the new proposal formed a ‘good basis for progress during Asian trade.

The barrage of headline risk will therefore ramp up in European trade ahead of the finance ministers meeting at 20:30 AEST. Any information from ECB sources around liquidity for Greek banks also seems critical as there is rising concern specifically from the Germans around the level of funding being provided to Greek banks. It promises to be a crazy trading session, although it’s also interesting to see that no one is really buying volatility today through various options structures. From this point of view, things are quite sanguine.

Sanguine is not the case in China and, if it weren’t for the market being closed, we could have seen a further rout. Short-term repo rates spiked 51 basis points last week in China as a result of the tightening in liquidity, so the bulls would have liked to have seen measures announced over the weekend, such as a cut to banks reserve ratios. This hasn’t occurred, but it was certainly bullish to see such strong foreign buying of Chinese shares through the Hong Kong to Shanghai ‘northbound’ Connect in the final couple of hours and as things stand the Hong Kong market is modestly higher. Whether this buy-the-dips strategy proves a little too aggressive is yet to be seen, but it is worth pointing out that the 55-day moving average which contained the pullbacks in the Shanghai Composite since early 2014 has been breached and all eyes now fall on the 29 May pivot of 4,431 (1% from current levels).  A break here and things may get ugly, in my opinion.

Equity markets just shouldn’t fall 13% in a week, but this is no ordinary market and these are not ordinary times. It is still the most interesting show on earth and, if retail traders (who make up 80% of the daily turnover) can chase momentum higher, they can easily start panicking when the party music stops – especially given the rally wasn’t based on traditional fundamentals. Tomorrow’s open will hold a lot of answers and the bulls will need to hear soothing words from the PBoC or this bout of profit taking could turn into something more aggressive.

Still, with economic data taking a back seat this week we should have learnt this by the coming weekend:

  • Whether Greece is likely to obtain the capital to pay its near-term debt obligations.
  • Whether markets are actually complacent about Greece, or whether it really is just a huge distraction.
  • Whether the Chinese ‘Dama’s’ will panic and take profits in a market where the word ‘bubble’ is being thrown around quite liberally.
  • Whether the market continues to ease off on USD longs, with EUR/USD specifically in focus.
  • Whether the ASX can break through clear supply (at 5.614) and continues its outperformance from last week.

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