A wild week closes. Will another begin?

China is averaging 9% intra-day swings this week and is down for the week. Europe is swinging through 1 to 2% intra-day moves, yet is actually up for the week. Australia is currently up 2.56% since Wednesday - double the 1.2% gain the market achieved throughout FY15. The US is in the same boat.

Wild traders
Source: Bloomberg

Wild trading swings are not going to slow come Monday – it is gearing up as a huge price action volatility trading day.

The outcome of Sunday’s Greek referendum is unknown, with poll variances making it almost impossible to get a good understanding of the likely outcome. Monday could be a massively negative or positive trading day.  

 

The short- and long-term risks

Short-term risk is clearly European – A ‘NO’ vote is a very real prospect.

Greek Finance minister Yanis Varoufakis has stated he and several other members of the SYRIZA party will resign if the ‘YES’ vote wins, meaning a new Greek election is a likely outcome of a ‘YES’ vote. This means more uncertainty.

‘Grexit’ is still a real possible outcome. In seven days Greece has a commercial debt repayment of €2.0 billion in treasury bills (10 July). Missing this payment is a clear default – Grexit is therefore very possible.

China is the next interesting case in point: China has lost 10 times Greece’s GDP in the past two weeks.

Despite indirect central government intervention after they demanded only positive commentary around Chinese equities, plus direct intervention in form of the PBoC rate cuts, Chinese markets are still falling. I expect major disorderly trading to persist.

On a regulatory front, China has now allowed retail investors to use their house as collateral to invest in the markets, further leveraging up the economy.

Longer-term risk: US non-farm payrolls suggest September ‘lift off’ is still a real possibility. Although the NFP figure was below consensus at 223,000 jobs added in June, the unemployment level fell to 5.3% from 5.5%.

However, wage growth in the US is still anaemic and there was a sharp decline in the size of the labour force, which could moderate lift-off expectations. This is a risk in itself. If September is overlooked as the month for ‘lift-off’, it will cloud the timeline. ‘Will they, won’t they’ trading is likely to lead to negatives for US markets.

Iron ore prices are back at levels most see as the longer-term price point, collapsing 6% last night to US$55.63 a tonne. Record output from Port Hedland was reported this week but the monthly value of iron ore exports fell to a revised five-year low in April and is still at 2010 levels despite a bounce in May.

The US earning season starts in a week; Australian full year-earnings starts in two.

 

Ahead of the Australian open

Having had three days of outperformance, I would suspect a bit of risk will be taken off the table considering US trade overnight. We are calling the ASX down 25 points to 5575, which is still a positive week. However, what happens come Monday morning is a risk for trading in both directions.

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