The Friday risk

This will be the third Friday in a row where markets head into the weekend with major risk events hanging over strategic thought.

Market risk
Source: Bloomberg

Greece has submitted its final proposal to the troika – will it be accepted? (the market is suggesting yes)

China will have serious questions around future stability. After the weeks of turmoil, limit down on Wednesday, limit up yesterday and one of the biggest one-day swings in several commodities, the huge regulatory intervention will need to continue to create ‘further stability’.


What’s spiking my interest

To recap, China’s round of regulatory and simulative measures so far has:

  • Banned short selling
  • Threatened to arrest people speculating
  • Only allowed buying by state-owned pension funds and institutions
  • Also performed a form of quantitive easing combined with massive liquidly easing

There is only one direction the market can go under these circumstances - up.

The A50 was up 17% at one point yesterday - double limit up then blue-sky trading after the complete opposite on Wednesday.

China’s response to the past 18 days of turmoil will create perceptions that further liberalisations and free market principles will be abandoned as Beijing grapples with additional regulations – this will create longer-term issues.

Iron ore has had its largest single-day fall and gain in the space of 48 hours. Dalian futures were limit up yesterday and then jumped again when they returned. The rally in Australian miners yesterday was clearly following this lead.

Nickel, copper, zinc and Brent had their best trading days of the year – materials will likely buck the weekend risk selling.

Greece has just proposed that it will run a prime surplus of 1% in this financial year – really? In the same proposal it asks for serious debt restructuring while raising overall corporate VAT to 28% from 26% and increasing other corporate tax rates.

The key line is that Greece has stated this deal is very similar to the deal the EU creditors offered to Greece in late June. But didn’t they just vote against this?

European futures, however, are liking what they see. The DAX has rallied 150 points on the news from Greece. US futures are up 0.9%.

I would suspect this will be the first Friday in weeks where investors might be happy to buy risk.


Ahead of the Australian open

We are currently calling the ASX up 13 points to 5492. Has China and Greece been solved? We will see.

 US earning session starts in earnest next week and most major G10 central banks meet for July rate decisions. The VIX will be in for a big moving week.

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