Markets Relatively Calm After Greek No

The Greek government won the popular vote to reject the creditors offer, yet it may not strengthen PM Tsipras’ negotiating hand.  On the other side of the world, China provided a surprise this weekend by upping its support for the stock market.

  • The Greek government won the popular vote to reject the creditors offer, yet Prime Minister Tsipras may find that it has not strengthened his negotiating hand; it does not mean Greece will leave the euro
  • The ECB will reportedly meet to discuss the Greek central bank’s request for new ELA access, but there is no reason to expect this to be forthcoming
  • China provided the other surprise over the weekend, upping its support for the stock market
  • Commodity prices continue their swoon, adding to the negative global backdrop for EM

 

Price action: Price action in the day after the Greek referendum was more subdued than many have expected. The euro gapped lower at the Asian open, but has since filled that gap and so far has remained within the range seen a week ago, now trading at around $1.1050. The pound continues to trade lower but halted its decline right at the 50-day MA around $1.5550. The biggest mover of the day was the Norwegian krona, with the dollar making its first clean break above the NOK 8.0 level since April, likely influenced by the sharp drop in oil prices. The dollar is slightly weaker against the yen at ¥122.60. RUB and MYR are underperforming in the EM space, in line with lower oil prices. MSCI Asia Pacific was down 2%, with the Nikkei shedding 2% even as the Shanghai Composite added 2.4%. MSCI EM dropped 2%, down the fourth straight day. Euro Stoxx 600 is down 0.6% near midday, while S&P futures are pointing to a lower open. Sovereign debt yields are mixed, falling 7 bp in the US and 4 bp in Germany in the 10-year space. EU periphery yields are up 8-12 bp, dragged higher by a nearly 320 bp jump in Greece, according to Bloomberg pricing. WTI is down 4% on the day, copper futures are down 3.6%, and other commodity futures are off as well.

 

  • The Greek government won the popular vote to reject the creditors offer, yet Prime Minister Tsipras may find that it has not strengthened his negotiating hand. To the contrary, the range of options has narrowed, and the Greek financial system is collapsing. Tsipras has said he will go to Brussels and sign a revised deal within 24 hours. This is most unlikely. The second assistance program ended on June 30. A new one will have to be negotiated. This appears to require some parliaments, like Germany’s, to authorize the negotiations. It is not only a function of time, but desire. Judging from the IMF’s report last week, without debt relief for Greece, the multilateral lender might not participate in a third program either.
  • The ECB will reportedly meet to discuss the Greek central bank’s request for new ELA access, but there is no reason to expect this to be forthcoming. The job of the ECB is not to support banks unconditionally. They need to be solvent. Bank can use a broader range of collateral in ELA borrowings than on loans from the ECB. There has been a concern that Greek banks were exhausting their supply of such assets. The past week only exacerbated this pressure. Without ELA funding, the image of monetary asphyxiation seems fitting (though it gives the Greek government no reason, then, to threaten to hold its breath). Banks are running out of cash. Some suggest that there are sufficient notes until around mid-week, but no one seems to know. The longer it persists, of course, the greater the economic impact. Business failures, in turn, worsen the quality of the Greek banks’ loan book.
  • The results of the referendum do not necessarily mean that Greece will leave the monetary union. There are still many steps to get from here to there. The political commitment to the irreversible nature of monetary union should not be under-estimated.
  • China provided the other surprise over the weekend. In short: (1) officials suspended IPOs, (2) 25 mutual fund companies declared they would “actively” buy stocks and hold for a year, (3) 21 brokerage firms pledged to invest 15% of assets into the markets, (4) China’s sovereign wealth fund will also join in buying, (5) corporates are being encouraged to buy back their own shares, (6) regulators may make it harder to short shares, and (7) the PBOC will increase liquidity provisions, including an RMB100 bln increase in capital to China Securities Finance Corp., which manages margin trading. The result: a 2.4% for the Shanghai Composite today.
  • Here, we provide some thoughts on just what the Chinese policymakers are trying to accomplish. Bluntly speaking, we think it is a mistake for China to attempt to target the equity markets. It is already targeting growth and inflation, as well as the exchange rate (though that is perhaps open to discussion going forward), all whilst trying to liberalize the economy and opening up the capital account. By adding an equity market target to an already impossible trinity, policymakers simply are juggling too many balls. We think risks of a crisis are building.
  • We argued earlier this year that policymakers were wrong to act as a “cheerleader” for the equity market rally, as investors would view this as some sort of variation on the “Greenspan Put.” Well, that’s exactly what has developed. Painted into a corner by plunging equity markets, policymakers were forced to take concrete steps to support them. This may be a short-term solution, but longer-term, the problems continue to build.
  • Moral hazard will likely become an issue in the coming months. Should equity investors really be encouraged to take on more margins lending in an already stretched (by almost any measure) market? Leverage produces not only outsized gains, but also outsized losses if the market moves against them. What happens to these investors if the bear market deepens? Or to the banks holding these margin loans? There are simply too many moving parts now.
  • Commodity prices aren’t helping market sentiment. Oil prices have been hit by reports that the Saudis have cut August prices for Asia, as well as by reports last week of a higher US rig count. Brent is leading this move, now testing the 62% retracement objective of the March-May bounce around $59.00. By comparison, WTI just broke below its 38% objective of its March-May bounce, near $54.73. Still, WTI has broken below recent ranges to trade below $55, at the lowest level since April 15.
  • And it’s not just oil. Iron ore is sinking fast too, and is about to test the 62% objective of its April-June bounce near 54.16. A break below would set up a test of the April cycle low near 47.08. While the correlation between iron ore and AUD is not very strong, the risk off sentiment coupled with lower ore prices and rising China concerns have all conspired to push the Aussie below .7500, for the first time since 2009. It has since recovered to trade slightly above that level, but we think the downside will continue to be probed. The global backdrop has also hurt EM currencies, which are starting the week of on a soft note. Here too, we expect selling pressures to continue.