Greece to dominate headlines

Global markets continued to take the Greek saga in its stride. Much of the calm originated from a belief that we could still see some deal soon.

Man waves Greek flag
Source: Bloomberg

Misguided belief or not, we would only know over the next few days or weeks as the Euro-area leaders meet in Brussels at 1pm today (7pm SGT), to discuss about Greece.

To be sure, markets are still nervous, but they are not allowing it to turn into panic.

Asian equity markets were the first to react to the Greece result and they expressed their discomfort at the ‘no’ vote.

The risk aversion was carried over to the overnight European and US markets.

There was a flight to safety in haven sovereign bonds such as US Treasuries, and German bunds, while peripheral European debt, including Italy and Spain, were under pressure on political contagion risks.

What was interesting was the resilience of euro and the relatively composed FX space. The EUR/USD remained supported above 1.10. Short EUR sellers were quite wary of committing aggressively to their positions after Monday’s short-squeeze from sub-1.10 levels. They are waiting for a stronger confirmation of fresh downward momentum, which means a clear break of 1.0950.

To be clear, Greece is still keen to negotiate an agreement regardless of the outcome from Sunday’s referendum. The only difference between the two outcomes was whether the Greeks come to the table with a better bargaining chip or not.

Still, few of those on the creditors’ side enjoy dealing with the current Greek government amid the latter’s dramatic rhetoric, espousing accusations such as blackmail and terrorism. But the surprise resignation of Finance Minister Varoufakis may be Greece’s way of saying that they are willing to soften their emotive behaviour in the view of the European lenders. Deputy Foreign Minister Tsakalotos was tapped as the new FinMin and is seen to be less abrasive. This certainly helped sentiments.

As expected, the ECB refused to be the Greece executor, choosing to maintain the ELA but raising collateral haircuts. They may be more willing to cut off the liquidity pipeline to Greek banks if there is further clear evidence of a default. The most likely date for this is 20 July 2015, where Greece is due to repay €3.5 billion directly to the ECB. Failure to do so would quite possibly (and reasonably) withdraw the ECB support.

China strives for stability

Stability is a key word in China, but we have not seen much of that in the equity markets for most of this year. Over the last three weeks, the downward leg has shed $3.2 trillion off the Chinese stock markets, and increased volatility massively. Fluctuations of this magnitude is not keeping to the stability objective, which makes Beijing very uncomfortable.

Just one month or so ago, retail market entrants were piling into the red-hot stock market, forgoing thoughts that they could be the greater fools. In hindsight, they arrived late to the party and lost heavily, compounded with the use of leverage. There were reports of individuals losing much of their savings, betting what they thought was a state-sponsored rally in stock markets.

According to the Financial Times, around 17% of the Chinese stock market capitalisation is supported by margin financing, which raised concerns of potential systemic risks. The recent deleveraging in the Chinese markets made these concerns very real. Hence, we are now seeing a coordinated response from the government and the financial community.

The government has halted IPOs to stabilise the market and preserve liquidity and authorities also established a market stabilisation fund, which will involve 21 Chinese brokers, led by Citic Securities.

The amount invested will be no less than CNY 120 billion, and the local firms have pledged not to sell existing shares as long as the Shanghai Composite remains below 4,500 (currently 3775). In addition, 57 Chinese mutual funds reportedly will invest CNY 2.2 billion in stock funds. Furthermore, the People’s Bank of China will provide liquidity support to the China Securities Finance Corp, China’s margin trading financing arm, to strengthen its ability to stabilise the stock market.

Meanwhile, Ping An Securities has suspended short selling given recent market conditions. The broker also raised the conversion ratio of stocks included in the CSI 300 Index as collateral. The risk is that more brokers may follow, if market conditions do not improve. I feel authorities will implement stronger measures until the stock market stabilises.

Looking ahead Asia, Japan, and Australia are looking positive, with sentiments noticeably improving after the ECB maintained the liquidity support to Greece. The market is rather optimistic that the Greece crisis will be resolved.

We could see that risk appetite spread through Asian markets today. Nonetheless, I remain cautious for any recovery, as headline risks out of Greece will still move markets. I would also keep my eye on China given the recent barrage of government and private sector’s measures to soothe jitters.

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