Over the last week I’ve often mentioned the Chinese equity markets, and the dramatic goings on there, but perhaps a picture speaks a thousand words. Look at the chart below. The market closed just shy of 10% down, but has been as much as 13% down today. These are dramatic moves by any measure, and probably represents a larger loss of financial wealth than anything that happens in Greece from this point on. Fortunately such losses are likely to be dispersed amongst a very large group of people so this situation is considerably less tragic than anything going on near the Mediterranean. But as I’ve mentioned before, there could be global implications, whether it’s contagion to other equity markets around the world, social instability in China, or politicians in China implementing policy on the hoof in reaction to these events. It will bear watching.
The industrial production data published in the UK showed a solid improvement of +2.1% versus 1.2% previously. For now it seems the UK economy is shrugging off any tailwinds related to the Greek crisis. It is uncertain if there will be tailwinds, one could imagine some, but this is for the future clearly, given the better than expected industrial activity currently.
In Europe, it appears that time is running out to avoid Grexit. Rather than bolstering the position of the Greek government, the No vote looks like it further limits what creditors will find acceptable in terms of proposals from the Greeks. The Eurogroup has effectively given Greece a deadline to come up with comprehensive proposals – 5 days, the time for interim agreements is over. Every day this crisis continues, the probability of Grexit rises. The ECB estimates that Greek banks can hold on until the end of the week, but as things stand there are no plans to extend liquidity further than that. It’s hard to see how Greek banks won’t start to go under.
Yesterday saw fairly significant falls for both EUR/USD and GBP/USD, in fact over the last couple of days EUR/GBP is actually a bit higher. Meanwhile the Japanese yen has acquired a bit of a safe haven status given the calamity going on in the Chinese equity markets. The broad picture still shows a steadily appreciating dollar, but at the moment I wouldn’t characterise is as a general move. That said we continue to see dollar strength as the path of least resistance, with the most likely victims being the euro and the pound sterling. Oil sensitive currencies like the Russian rouble and naira should also be vulnerable to weakening at this time. While support levels are maintained in the US equity markets the red warning light will remain switched off, but this is a fluid market with 3 very significant occurrences so far this week:
- Chinese equity market falls
- Oil price falls
- Greek crisis
The light could start flashing at any time…
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