The trinity of risk to dominate – Greece, China and the Fed

Overnight trading cues suggest that we could see some risk appetite today. 

Federal reserve building
Source: Bloomberg

The European and US markets followed the rebound in Chinese equities to end their respective sessions with gains. European equities were bolstered by increasing prospects of a done Greek deal.

Bloomberg reported that Greece has submitted a new reform plan, which is more in line with the creditors’.

The debt-ridden country’s reform package offered pension savings and tax increases.

This certainly helped sentiments, where we see the market reacting immediately. The VIX futures (Jul 15) falling over 90 pips to 17.9, indicating easing volatility. We also see the euro strengthening against the USD and JPY.

However, the latest reform proposal still needs to pass through Greek parliament today, before forming the basis for negotiations with the European leaders over the weekend. The Eurogroup will discuss the plan on Saturday, ahead of a summit of EU leaders on Sunday.

The high degree of concession offered by Greece improved the odds of a favourable outcome, which will pave the way for a new bailout package. Nonetheless, the prospects of Grexit are still very real, given the twists and turns in the talks over the past few months.

In Asia, we expect China to be the main focus for markets on Friday. The Chinese authorities have intensified efforts to stem the sharpest drop in stocks since 1992, with fresh measures announced almost daily for the past week or so.

The over 30% slump in Chinese equities has erased $3.88 trillion of market value, since 12 June 2015, so naturally Beijing is concerned over the ferocity of the correction. The government appeared not to be resting on its laurels, with the CSRC suspending reviews of IPOs, according to Bloomberg.

In addition, the securities regulator is urging listed companies to protect share prices through one of five measures, which are major hold stake increase, share buyback, share purchases by firm executives, stock ownership incentive, and employee shareholding programme. Banks are also providing preferential loans to public companies looking to buy back their shares.

There are some signs that foreign investors are more optimistic about China’s efforts to arrest the stock slide, with the Deutsche X-trackers CSI 300 ETF surging a massive 20% to $40.69 yesterday. However, I feel much caution should be exercised and it is important to observe the Chinese markets in the coming sessions before calling it a bottom.

As we have seen in the past, Chinese equities may recover in one session, only to fall straight back into a downward spiral the next day. Nevertheless, despite substantial reputational risks, the authorities are stepping up measures to shore up the stock markets, and had included support for small- and medium-cap stocks. I think we would see a clearer picture when most of the suspended A-shares resume trading.

Next week brings more risk

Once again, we head into the weekend with three big themes, where two are very familiar to traders. Ongoing talks over Greece’s fate will share the headlines with China’s stock markets. How the Chinese equities perform today will decide whether Beijing will load support measures over the weekend. In addition, the timing of the imminent Fed rate hike will be under scrutiny especially when the market appears to be expecting no rate hike this year, according to the Morgan Stanley Index.

Next week will also bring a list of market events. In the US, Fed-speak, macro data, and corporate earnings will shape the domestic markets. A good deal of focus will be on Chairperson Janet Yellen’s congressional testimony on Wednesday, 15 July. Market should receive more information regarding the Fed’s view on international risks and their bearing on monetary policy.

For Europe, the binary outcome from weekend developments will influence market sentiments. Needless to speak, any negative development on the latest Greek proposal will see Grexit fears spike. Risk aversion will follow.

Closer to home in Asia, China’s Q2 GDP is due on Wednesday 15 July, where the market is looking for a sub-7% print, at 6.8%. It will be too early to attribute the slowdown (if any) to recent stock market developments. If the stock slump does transmit weakness to the real economy, we would only see that in the Q3.

In my view, recent equity correction has relatively modest impact on the Chinese economy, as less than 15% of household financial assets are invested in the stock market. This means consumption is unlikely to be affected much.

China will also be releasing credit data, aggregate financing, trade numbers, retail sales, and industrial production and property prices. It will be a data-heavy week for China watchers. In Singapore, advance estimate for Q2 GDP is on the tap on Tuesday 14 July, along with export reading on Thursday 16 July. 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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