Greece woes overshadow China stimulus

Headline risks in the past two weeks were dominated by the Greece debt crisis and tumbling Chinese equities.

Greek flag
Source: Bloomberg

Fresh developments in both countries over the weekend are set to drive market sentiments this week, although I feel the latest twist in Greece will overshadow China’s move to ease rates further.

Let’s start with Greece. It’s quite a whirlwind tour how the market was fairly optimistic about Greece at the start of last week, with the emergency meeting showing a good step forward.

At the end of last week, the talks were broken down again. Now, Greek Prime Minister, Alexis Tsipras, is calling for a referendum next Sunday 5 July, as well as a bank closure, starting today to avoid a bank run. Capital controls were also part of the mix to prevent a financial collapse. According to local newspaper Kathimerini, Greek banks may remain shut at least until after the referendum.

The debt-ridden country is almost certain to miss the EUR1.5 billion repayment to IMF on Tuesday, which means the international lender cannot provide additional assistance. Meanwhile, I am not sure how the referendum is going to work out even if there is a ‘yes’ vote as the Troika’s proposal has been effectively being pulled.

The current bailout programme will expire Tuesday 30 June, and this means Greece will have to negotiate a new bailout programme. Put differently, the Greeks will be voting on a set of bailout proposals that are no longer under consideration next Sunday as the deadline is tomorrow.

The rather sudden turn of events has already introduce significant jitters into the market. The euro fell 1.5% to below 1.10 in early Asia. There is a belief that we could see price swings almost rivalling that of the removal of the EUR/CHF peg in January. Oil sank over 1%.

Investors sought the safety of haven assets after Sunday’s announcement. Gold futures jumped, accompanied by demand for the greenback and the Japanese Yen. The dollar Index climbed above 96, while the JPY strengthened to around mid-122. 

PBOC probably has no wish to see the market crash

It’s probably bad timing for the latest PBOC monetary easing over the weekend in light of the Greece occurrence, but maybe not. China’s central bank announced on Saturday to implement a 25bps rate cut to its benchmark interest rates (lending and deposit rates are now effectively at 4.85% and 2.00% respectively), and cut the reserve requirement ratio by 50bps for targeted banks.                

The estimated monies released here is CNY650 billion ($106.5 billion). This should help raise growth estimates and create support for the Chinese economy.

Although the official justification for the rate move was to lower borrowing costs and stabilise economic growth, I cannot help but wonder if the sharp sell-off over the last two weeks has a strong influence in precipitating the timing of this move. This is a significant departure from the past where it was clear that any policy move was to support growth.

The fact of the matter is that the direct spill-over of a stock market collapse to the real economy is fairly modest. As a whole, households still have a strong balance sheet, with equity allocation still limited to less than 10% of GDP. Moreover, the proportion of households using leverage for equity investment is likely to be small and biased towards the wealthier segments with a lower marginal propensity to consumer.

Beijing is concerned with the confidence factor. We have already known for some time that the Chinese authorities are not too comfortable with excessive speculations, which are vulnerable to a sudden shift in sentiments.

A reversal will dent the confidence in the capital markets, which is detrimental to the perception that the Chinese authorities want to build. Therefore they have started to tighten measures on margin lending to rein in over-exuberant investors. Meanwhile, the latest policy move suggests that they appear to have little appetite for an equity crash.

The Chinese is anaemic to extreme volatility and stability is something they hold close to their heart. So now, we have the ‘Zhou put’ option, a Chinese version to the Draghi put. The perception of whether the PBOC intends to or not, at this stage the central bank has effectively put a floor under asset prices, like a put option on a stock.

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