Market focus turns to Greece

Anyone looking for post-FOMC cheer on what appeared to be a relatively dovish statement will find none in Asia today. With back-to-back risk events taking place this week, traders are now waiting for fresh developments out of Greece ahead of the EU finance ministers’ meeting.

Greece Flag
Source: Bloomberg

The hardening stance between Greece and its creditors is making a potential Grexit appear more likely, although we probably will see a default first.

Major payments are on the cards in July and August, and it seems almost impossible for Greece to make the payments. Even if we see a last minute deal hastily put together, it will just be a stop-gap measure for the short term.

The reality is Greece has no money to service its debt. The absence of any sustainable bailout agreement will have long-term consequences and implications.

So even if a Grexit might seem very likely, I still get the sense that most politicians as well as the market would prefer Greece to stay in the Eurozone. The main argument for this view stems from the danger of a knock-on effect on other peripheral members in the regional bloc.

The downplaying of the risks of a Grexit perhaps reflect the under-appreciation of the dynamics of a default. Nonetheless, expectations for any kind of resolution are low, and with large amounts of deposits fleeing the Greece banking system, we could see growing prospects from the imposition of capital controls.

The key risk is that if the ECB emergency liquidity lifeline will be cut if Greek banks are deemed to be insolvent. The absurdity of all this is that EUR is still holding up well despite Greece’s predicament and its broader implications. However, EUR/USD short may look attractive on the approach of the $1.1400 handle.

In Asia, Chinese equities started off on a neutral tone before collapsing as broad-based selling ensued. China A50 and CSI 300 Index fell over 4%, with sentiments still beaten by a combination of tighter margin lending and fears of narrowing liquidity.

The ChiNext Index tumbled 6.3%, more than reversing yesterday’s gains of 4.2%. Additionally, there are concerns emanating from overstretched valuations. While the demand for IPO remains compelling, there are signs of fatigue.

From the peak on 27 May, the Bloomberg China IPO Index, which measures the performance of Chinese shares during their first year of public float, has fallen nearly 15%. In the first four days of this week, CSI 300 chalked up 7.6% of losses and is heading towards the steepest weekly loss since February 2009.

Noble flailing the ‘share buyback’ horse

In spite of a fourth share buyback of 39.7 million units, bringing the total to 102.7 million, Noble share prices fell under SGD 0.70 today. To be fair, the market tone in Asia was banking southwards on Thursday, which would have negated the positive effect of the stock repurchase.

The rebuttal from Mr Michael Dee, the outspoken ex-chief of Morgan Stanley Southeast Asia, may have worsened investors’ perspective towards the commodity trading firm. Meanwhile, the Straits Times Index (STI) drifted to the bottom of the recent consolidation range, eyeing another test below key 3300 support.

Banks have led the market lower, with DBS and OCBC remaining on the slide, although UOB was somewhat more resilient today. Perhaps news that UOB intends to strengthen its RMB capabilities to tap on the Belt and Road Initiative helped cushioned the counter.

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