Sufficient market pricing for Grexit risk?

While risk is evidently sitting on the sidelines amid the latest Greek saga, mass panic selling did not emerge.

Grexit headline on Newspaper
Source: Bloomberg

Nonetheless, a sharp blow to the market tone was clear for all to see, with Asian markets wading in a sea of red. The ASX and Nikkei slumped over 2%, while China equities flailed wildly on Monday.

Investors seeking safe haven assets has really been limited to fixed income demands, where US treasury futures and German bunds saw a solid 15- and 20-bps move lower.

The dollar and Japanese Yen also appeared to be favourites as safe haven assets. Gold has done very little today, with a mild 0.7% gain and still capped below $1190.

I am not sure if the markets have remained complacent over the potential implications of a Greek default, especially if it leads to a Grexit scenario. Although, EUR/USD tumbled a good 200 pips early on, it has somewhat recovered, with a strong defence seen below the 1.10 handle.

Instead, traders seemed to be more inclined to hedge their bets in the options markets, with the one-month implied volatility in the EUR/USD leaping to an over three-year high of 14.62.

Furthermore, European traders covered their shorts as Europe resumed trade, pushing the EUR/USD to high-1.10. However, it is unlikely that the short covering bids would be sufficient enough to close the gap, with more offers seen through to 1.1150. As such, further recovery beyond 1.11 may be hampered, particularly given the ongoing Greece situation.

CSRC sees room for margin lending to grow

During the last three interest rate cuts, prior to the latest one on Saturday, the Chinese stock markets rallied in the following session. Not this time. Mainland equities continued to engage in wild fluctuations at the start of the week, before ending the session. The CSI 300 fell 3.3%, which saw its accumulated losses from the peak on Monday 8 June, to just over 20%. This means Chinese equities are now treading in bear territory.

The very noticeable failure of the simultaneous cut of the interest rate and the reserve requirement ratio (for targeted banks) to catch the downward spiral in Chinese equities, prompted a rare move by the Chinese regulator.

The China Securities Regulatory Commission (CSRC) assured the market this afternoon that it continues to see growth in margin financing. This is one of the clearest sign that Beijing wants to bull run to carry on, but probably not in an uncontrolled manner.

The securities regulator also dispelled market talks that there has been a sharp increase in margin calls, on a potent combination of high leverage and recent price slump. The CSRC revealed that less than CNY 4 billion of margin trades were forced to sell off on 25-26 June, while there was about CNY 2.2 billion of margin calls this morning.

These amounts made up less than 1% of the average daily trading volume, which is routinely over CNY 1 trillion. The Chinese markets initially reacted positively to the comments but the rebound was not sustained into the close. In recent developments, it was reported that the CSRC is considering suspending IPOs to stabilise the domestic equity markets.

Funds are usually locked up ahead of a batch of new listings, and the amount of monies diverted for subscription has jumped to over $1 trillion recently, due to the ‘sure-win’ bet. Newly-issued shares habitually reached limit-ups on the first day of trading, which translated into a 43-44% gain in one session.

If there is no suspension, the next tranche of 28 IPOs, which starts early July, is estimated to tie up CNY 4 trillion ($645 billion). The liquidity drain is likely to peak on Monday 6 July when an estimated CNY 1.80-1.85 trillion is frozen for subscription.

Meanwhile, the Chinese government has approved the National Social Security Fund (NSSF), the country’s largest pension fund, to manage about CNY 2 trillion ($ 322 billion) in local pension funds. The recent sharp stock slide may have hasten the approval decision, which could see more liquidity entering the A-share markets.

It promises to be a very interesting week for China and I believe the government will do more to arrest the bearish momentum in Chinese stocks from getting out of hand. Whether they come up with enough would be a different question.

Singapore stocks gap down on Greece

The Straits Times Index (STI) has decisively broken below the 3300 support today, gapping down to a 2015 low of 3267.68, dovetailing with the global risk aversion. The deteriorating Greek situation has led to a sell-off in global equities, which had spread to Singapore shores.

We could see the Index struggling to regain above the 3300 this week, given that there is still a host of uncertainty surrounding how the Greek saga will play out. The daily MACD line is turning lower, and possibly set to return below the signal line in the coming sessions.

Looking at the weekly MACD, it shows a similarly bearish outlook, with the MACD line remaining below both the signal and the zero line. The fact that the 14-day RSI still has some room from the oversold level suggests that a further downside may not be limited.

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