Greece and China market turmoil take centre stage
Analysis
By business reporter Stephen Letts
Updated Mon at 10:38am
Photo: Greeks have voted against austerity, the question is whether other eurozone nations will cast their decision against Greece staying in the currency union. (Reuters: Jean-Paul Pelissier)
Map: Australia
In usual circumstances a Reserve Board meeting would be front and centre in local investors' thinking, but the messes in Greece and China, coupled with the market pricing in less than a 10 per cent chance of a rate cut means Tuesday's deliberations could well be filed under 'whatever' this week.
Greece says 'no' The 'noes' have it, with the Greek electorate voting against a bailout package that had been taken off the table anyway.
It doesn't guarantee an exit from the eurozone but heightens the risk substantially.
Much of the reaction will centre on just how messy the market thinks a 'Grexit' could get.
Technically, a default on the International Monetary Fund's 1.5 billion euro repayment hasn't been called and there will be a flurry of talks aimed at a new deal and most likely more kicking the can down the proverbial road.
The short-term focus for Greece – and for that matter, financial markets around the world – is the solvency of the teetering Greek banks and whether the European Central Bank's emergency 90 billion euros in funding is still available.
If the ECB cuts the Emergency Liquidity Assistance (ELA), the upshot would be a collapse of the Greek banking sector.
That would produce an even more chaotic situation and most likely force the Greek government to issue a new parallel currency almost immediately.
What happens next is anyone's guess.
Credit Suisse's equity strategy team had a crack nonetheless.
"Previous euro-crisis episodes suggest a coming bungee jump for Aussie equities," Credit Suisse told clients.
"The initial risk-off mode will take markets lower, the potential for an aggressive policy response will propel them higher."
Credit Suisse made three suggestions for Australian investors to consider:
* Defensive companies
* Companies with US exposure which will benefit from a stronger US dollar and easier Fed policy
* Companies who are largely self-funded and don't need to go to the market for fresh capital
Alternatively, given bungee jumping is not without risks and it is difficult to jump from the bottom of the dive, investors could just sit tight and keep out of the market.
Chinese government steps in
Greece dominated the headlines last week, but the conniptions in China may have a far greater material impact in Australia.
Last week ended badly, with the Shanghai index falling about 6 per cent on Friday.
The iron ore price also tanked, tumbling 6 per cent and looking like it's heading back to sub $US50 a tonne territory.
The Chinese market is down about 30 per cent from its peak less than a month ago, although it's still up a very bubble-like 80 per cent over the past 12 months.
However, it's fair to say a trend is developing and appears to be vertiginously down.
So what would a fully blown crash mean?
The French investment bank Societe Generale said, while painful, the immediate "damage should be manageable" leading to perhaps another 0.5 to 1 per cent being chopped off an already faltering GDP number.
Societe Generale argued the impact on Chinese households wouldn't be that great as Chinese families have about 75 per cent of their assets in cash and bank deposits and less than 15 per cent held in shares.
Households may account for more than 80 per cent of the turnover on the Shanghai exchange, but only about 20 per cent of families own shares.
Paradoxically a deeper market correction may even deliver some stability.
According to reports over the weekend on the financial website Caijing, China's State Council has indefinitely suspended the flood of IPOs hitting the market, immediately stalling 28 floats listed for the Shanghai and Shenzen stock exchanges.
That may take the speculative edge off the market and encourage households to put more of their savings somewhere safer, like back into bank deposits.
However, Societe Generale has grave concerns over the longer term about the government's interventions in the market.
"If, in response to the market volatility, the government had chosen to set back financial market liberalisation, the trust of investors would be hard to rebuild and equity financing, one of the critical elements of China's debt restructuring plan, would stall," the bank noted.
Regulators announced late on Friday a crackdown on trading in futures markets and an investigation into short selling on the Shanghai Exchange.
Nineteen trading accounts were suspended, which is probably nothing in terms of the margin debt built up in the system, but it will no doubt further spook an already very jittery market.
Also over the weekend, China's leading broking firms were summoned to a meeting with authorities in Beijing over the weekend to discuss the situation and make the obligatory statement that everybody had "full confidence in the development of China's capital markets".
Reuters reported that 21 brokers agreed to stump up 120 billion yuan – or $US19.3 billion – to try and put a floor under the collapse.
Reuters said a statement on the Securities Association of China website declared, "Twenty-one securities brokerages will jointly invest 15 per cent of net assets as of the end of June, or no less than 120 billion yuan, in blue chip exchange traded funds."
The brokers will not sell off holdings as long as the Shanghai Composite Index is below 4,500 points, Reuters said, while separately the Asset Management Association of China said the nation's 25 biggest mutual funds had also agreed to buy and hold equities for at least a year.
However, Bloomberg quoted one broker as saying 120 billion yuan "wouldn't last an hour in this market."
The next step is reportedly allowing the national pension plan to invest in shares.
Halting floats, tinkering with market focused monetary policy, futures trading crackdowns, investigations into short selling and getting brokers and pension funds to underwrite a collapsing market might just do the trick.
However, it could just be the start of greater government intervention, the winding back financial market liberalisation and the loss of investor trust that Societe Generale is fretting about.
RBA meets
JP Morgan's Stephen Walters' expectation for the Tuesday meeting is that, "the RBA is in a holding pattern as officials watch developments domestically and offshore, including the troubling events in Europe."
"We think it would take a lot to get officials to lower the cash rate again anytime soon – the preference still seems to be for lower Australian dollar to do the work, which remains a work in progress," Mr Walters said.
Happily for the RBA, the dollar has been on the slide lately down to a six-year low of around 75 US cents, the level governor Glenn Stevens described as being "more appropriate" late last year.
The RBA no doubt will also be hoping that the strong-arm tactics used by their regulatory mates over at APRA to get the banks to tighten lending criteria – particularly to investors – will soon subdue the property market.
For the record, inflation is under control, construction is booming, house prices in Sydney and Melbourne are bubbling and employment growth is solid, so an already reluctant RBA would be loathe to move again right now.
HSBC chief economist Paul Bloxham believes there's mounting evidence that the economy is rebalancing anyway.
"First quarter GDP confirmed that household consumption is growing solidly, dwelling investment is in a strong upswing and resource export volumes are ramping up, as new capacity comes on line ... more than offset(ing) the drag from falling mining and public investment," Mr Bloxham said.
Mr Bloxham argued there are clear signs that the RBA's February and May rate cuts have been feeding through to a further lift in the housing market.
"Housing prices rose by 9.8 per cent year-on-year in June and building approvals reached a new record high in May," he observed.
"Business surveys showed improving conditions and confidence in May, which could reflect the impact of this year's rate cuts as well as the government's more pro-growth budget.
"On the less positive side, the retail sales were quite weak."
Not only will there be no change in rates, there will be little if any change in the board's statement according to Stephen Walters.
"In terms of policy guidance, we doubt the statement will throw us any bones; RBA officials seem inclined to leave guidance to their speeches," Mr Walters noted.
Unemployment
Jobs figures (Thursday) will be the key domestic data release of the week.
The last set of numbers saw 42,000 new jobs created in May, to record the strongest year-on-year employment in four years.
Oddly enough, hours worked were flat and WA's unemployment rate dropped back to 5.1 per cent, which doesn't sit comfortably with the idea of the resources downturn and a sharp fall in mining jobs.
Equally strange is the jobs number heading north, while the wage price index heads south, leading UBS economists to ask whether "we can really believe the jobs data?"
Unlike US payroll figures, where the actual number of jobs are counted, the ABS labour force data is a survey of tiny 0.32 per cent of the population aged 15 or above.
As UBS pointed out, the survey's 95 per cent confidence interval meant May's 42,000 increase in fact had a range of between a loss of 16,000 jobs through to a 100,000 gain.
"Overall, the 'truth' of the labour market is probably somewhere between the stronger signal from the 'survey data' provided by the ABS … versus GDP which shows weak household income growth and wage index data dropping to a record low," UBS noted.
Citi's Paul Brennan for one doesn't think that the labour market can hold on to its solid gain in May and forecasts the loss of 5,000 jobs in June and unemployment to edge up to 6.1 per cent.
Diary notes:
Australia
READ MORE: http://www.abc.net.au/news/2015-07-06/greece-and-china-market-turmoil-take-centre-stage/6597254
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