Happy FY2016

Greece crossed into the great unknown this morning as it ‘defaults’ on its IMF loan repayments. It joins two other countries that are in arrears to the IMF – Sudan (in arrears since 1984) and Zimbabwe (in arrears since 2001).

Source: Bloomberg

However, the 5 July referendum is looming as a bigger market mover than Greece defaulting to the IMF. If a ‘NO’ vote transpires, Monday morning trade will be worse than Monday 29 June.

Currently, the bookies are pricing in a 70%/30% ‘YES’:’NO’ ratio. This seems high considering the mood on the street. The odds of Greece leaving the Eurozone in 2015 remains steady at 1.25 to 2.5 to leave.

Athens is clearly walking to a different beat.

Overnight, Greece did ask for a new two-year fund deal– it has promptly been rejected.

So with no major news from Europe I want to look at the end of the financial year (EOFY) for the ASX.


Scorecard for the ASX from FY15:

At the close of FY15, the ASX logged a 1.17% gain over the financial year, its third consecutive year in the green and something it hasn’t done for five years. The last (financial) three-year run was FY05 to FY07.

There was classic EOFY trading yesterday – the market took off at bang on 3pm after having dithered all session. Volumes increased and market-wide buying began as books were closed. This is unlikely to follow through to trade this morning.

The ASX remains in the green up 1.01% year-to-date. However, it fell into the red for the year several times yesterday and twice flirted with the technical correction point of 5397.

The month and quarterly prints do not make for pretty reading – the June quarter closed down 6.84%, its worst quarterly performance since the third quarter of 2011. This happened to be the start of the first Eurozone crisis and when the acronym PIIGS was invented.

(A side note: If you want to know the market’s concern about contagion, watch the spread between Italian bonds and German bunds – it is widening fast.)

For the month, June was down 5.51% - its worst monthly performance since May 2012 when it logged a 7.29% decline.

On a brighter note, July is historically the second-best performing month of the year (April is historically the strongest), averaging a 4.6% gain over the past three years. Every year is different but probability shows a July rally is likely – why?

  • It leads into the full-year reporting season (classic ‘buy the rumour, sell the fact’ trading).
  • US earnings season also starts and it’s the quarter leading into summer.
  • Repositioning for the new financial year.
  • Specific to this year – Greece voting YES and China rebounding.

The conclusion would be that July is likely to follow the historical trend. However, macro issues are looming large.


Ahead of the Australian open

There is data aplenty today in Asia:

  • Tankan data from Japan; the CAPEX numbers will be interesting.
  • Chinese official manufacturing data expectations are for a slender expansion of 50.3.
  • Building permits for Australia.
  • US ISM manufacturing.

China remains the market to watch; the swings back into the green yesterday were just as violent as the sell-offs on Monday and last Friday. It is fascinating to watch from afar. The momentum is still to the downside but I would expect wild positive trading almost as often as the selling seen.

We are currently calling the ASX down 40 points to 5418. BHP’s ADR is pointing to its lowest price point since January – but Sout32 has been stripped out so it’s not a true comparison. However, iron ore collapsed overnight and is back below US$60 a tonne, which will ripple through materials.

Today isn’t the best start to a new financial year, unfortunately.

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