What’s spiking my interest
China remains the key market for Asia. Yesterday’s trading is clearly the start of what is likely to be a very rocky trading period. Although not on the same level as the 4 June movements, Shanghai and Shenzhen were moving in to 1 to 2% swings in either direction in a matter of minutes, with double the volume of the S&P.
The interesting part of trading yesterday was the Chinese media outlets. News agencies had several articles out yesterday that ‘soothed investors’ concerns’. So my concerns about a disorderly sell-off may be misplaced if that is to continue. I think it’s something to watch.
The PBoC remains silent on cuts. Normally in the lead up to a move there are rumours and/or talk the big five are preparing for a move. However, there are currently no signs of this happening. Coupled with that, the CICC now believes the easing cycle is over from the PBoC.
Grexit – the more you read into the detail of the proposed deal, the more you can’t believe it. Yes, the IMF will be paid by Tuesday but there is no long-term, sustainable funding line here.
Europe clearly doesn’t want to test its so-called ‘firewalls’ to peripheral contagion and an agreement by no means guarantees Greece’s long term future in the European Monetary Union. It will, however, postpone the risk.
The ‘proposal’: A two-year €7.9 billion fiscal adjustment, involving €2.7 billion in the coming year before a ramp up to €5.2 billion in 16/17.
How will this happen? ‘Tax collection’ – Athens is proposing it will raise €7.9 billion through the new tax changes. Growth is still expected to bounce to 3%.
The SYRIZA party came to power arguing that these kind of measures were the reason for Greece’s financial trouble and had doomed the country into a low growth environment. It was suggested yesterday that between 10 to 40 SYRIZA MPs may dissent when the proposal is voted on in the Greek Parliament. That has since been revised to the upper end of that range. The further 12 MPs from a junior coalition partner are also likely to walk. SYRIZA has only an 11 seat minority, meaning the ‘done deal’ has a long way to go.
Even if the deal does get through, the issue falls back to the main stream of revenue – tax collection. No Greek government thus far has been able to propose new tax laws and then fully collect on them.
A ‘done deal’ for Tuesday maybe – but this isn’t a real long-term deal for Greece.
Come August, the next major round of debt repayments are due and a new deal will be needed.
EUR/USD and EUR/AUD are both under real pressure from what is transpiring.
Ahead of the Australian open
We are currently calling the ASX dead flat at 5683. The general market moves have been as expected – to the upside. However, it’s the confession season that is starting to really catch my attention.
Since 1 June, 14 majors have downgraded their earnings for FY15. All have been promptly punished.
The theme of the downgrades has been costs and competition but I see a bigger issue, in that top-line growth is non-existent. This is something I have seen coming for the last two years as the bottom-line growth has come from cost cutting and halting CAPEX. CEOs need to get inventive to stimulate this area.