Greek Stocks Lower, Iron Ore Higher and FX Intervention Risk

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Greek stocks have started trading today after a five week hiatus, FX intervention in EM is back in focus and iron ore has stage an impressive bounce despite commodity price tumbles.

1) Greek stocks have started trading today after a five-week hiatus – and it’s limit down for several shares. The ASE index opened down 23% in the first minutes of trading, but this was largely expected. Since the end of June, the US ETF GREK has dropped some 20%, giving a proxy indication of market sentiment. There are several restrictions still in place limiting what funds local investors can use to buy stocks, including tighter circuit breaker rules. Many of these restrictions were interpreted as favouring sales rather than purchase of stocks, hence further weighing on sentiment. Deputy PM Dragasakis was quoted saying that they hope to fully lift capital controls by October, pending the approval of the bailout deal, ECB liquidity and the bank recapitalization going ahead.

03.08 pic 12) FX intervention in EM is back in focus, and Brazil is on the top of the list for further action. There were two notable developments last week. Banco de Mexico announced that extraordinary dollar auctions will now be triggered by a 1% depreciation from the previous day’s fix (vs. 1.5% previously) and daily dollar auction sizes were increased. Separately, the Russian central bank halted its daily USD purchases “due to volatility on the domestic currency market.”  Brazil is the obvious candidate for stepping up its efforts against currency weakness. The BCB announced at the end of last week that it will maintain a pace of FX swaps rollovers at around 60%. This can be easily changed if volatility for the BRL continues at these levels. However, we think that the context may be more important than levels. In other words, a change in intervention strategy is more likely if the currency is moving out of line with what is happening to other EM currencies.

3) While commodity prices tumble across the board, iron ore has staged an impressive bounce, but this seems to have little to do with growth. Overnight, iron ore futures traded in the Dalian commodity exchange were up 3.1%, despite the weaker manufacturing PMI out of China and the third consecutive drop in the Shanghai comp. Over the last three weeks, futures rallied 13%, compared with a decline of around 12% in oil futures and 8% in copper futures (see graph). Rather than changes in Chinese growth expectations, one more likely driver for the recent price action could be the accumulated decline in inventories in Chinese ports. Inventories reached a 19-month low in June (see graph), then prices seemed to have finally reacted in July – volumes for iron ore trading surging 54% in July and inventories rose back a bit.

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