Uncertainty breeding fear

Asia is trading risk-off as confusion continues to reign in global markets – a Greek deal is yet to come together and the threat of a messy default looms. It’s almost as if investors don’t know how to move on without closure on the Greek issue.

Source: Bloomberg

The plan was to have an agreement between Greece and creditors which would have then been discussed by finance ministers and EU leaders. However, this did not play out and you get the sense leaders will have to work deep into the weekend to try knock something up by Monday.

Greek PM Alexis Tsipras remained optimistic a deal will be struck while German Chancellor Angela Merkel said she felt things had regressed a bit. In fact, the only development in Asian trade was a comment by Merkel suggesting it is not possible to find new money for Greece beyond what is left in the bailout programme.

Regardless, price action is certainly in a holding pattern as the eurogroup plans to reconvene on Saturday. The potential scenarios seem endless but the optimists feel a Grexit will not eventuate due to the union’s desire to remain whole. Capital controls being imposed will now be the biggest risk for Greece and markets in the near term.

China extends losses

While investors are in ‘wait and see mode’ on Greece, traders have been finding shorting opportunities as some markets trade risk-off. Recent falls in China are being greeted by mixed feelings among traders with a degree of scepticism that we could see a rebound at any time. For now, though, the bears are certainly in control with equities getting mauled.

Reasons for the slump in China stretch far and wide, including deleveraging, frothy valuations and extreme volatility causing nervousness.  While some markets in the region seem to have ignored some of the wild swings in China for a while, it’s now certainly casting a shadow on some key markets.

Apart from the Nikkei, which remains steady near 15-year highs, we have seen an unwind in some key markets today, including the ASX 200, which is now only up around 3% for the financial year. Volume in the domestic markets has also been huge today and perhaps this has something to do with the fact it was options expiry yesterday.

Last financial year we saw the local market sold off right up until 30 June as investors unwound underperforming stocks only to rebound significantly on 1 July like clockwork. Perhaps we are in for similar price action this time round but clearly there is a lot more at play right now than at the same time last year.

Weaker open for Europe

Uncertainty around Fed lift-off, the Greek deadlock and heavy losses in China remain the dominant themes. This makes it a very confusing landscape for investors and uncertainty breeds fear.

Heading into European trade, we are calling the major bourses weaker with a speech by BoE Governor Mark Carney likely to be the highlight in the absence of fresh Greek developments.

Looking at next week’s calendar, the main event will be what happens come 30 June when Greece’s IMF payment is due. Thereafter, focus switches back to a data-dependant US with payrolls numbers the highlight.

The week will be made even more interesting by the fact it is a short trading week for the US with Independence Day on Saturday, resulting in the holiday being moved to Friday. As a result, there will be a raft of releases to keep an eye on between Wednesday and Thursday ahead of the long weekend.

All these releases will have a bearing on how the greenback trades and we have been seeing it rise into non-farm payrolls releases off late.

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. 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. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.