There is a particular sense of uneasiness that is reverberating through global financial markets this morning, and while stopping short of alarm-bell ringing risk aversion, the underlying tone is somewhat downbeat. The queasiness began in Asia where Chinese stocks tumbled and the Shanghai Comp closed lower by roughly 3.5%, adding to the rollercoaster-like price action witnessed recently as valuations rocket well past where earnings growth would suggest. The challenge for investors will be to navigate around what looks to be an impending bubble in the Chinese stock market, as a bubble only becomes apparent once it pops and subsequently deflates. The vast wealth in China that has been rotating from the property market and into the equity market will help dissuade the notion of an impending burst of the rapidly inflating stock market, though it seems to be only a matter of time before there is a prolonged correction and investors decide to take profits off the table in a market that is twice as expensive as when the Shanghai Comp peaked in October of 2007.
The lack of any moderately hopefully developments in the Greek saga saw that the pessimistic developments in Asia filtered through to the European session. The proverbial kicking of the Greek debt can is beginning to run out of road, and the announcement that Greece would not be presenting a new proposal and that the Troika would have to work off the plan already deemed as inadequate has not inspired confidence throughout the investment community. The refusal of the Greek government to submit a new proposal makes the likelihood of a grand deal being agreed to by this Thursday’s finance minister meeting close to nil, and talks of Eurozone officials holding an emergency summit over the weekend increases the chances the Greek endgame is nearing. Given the full implications of a “Grexit” are still yet to be known with certainty, the uneasiness is prompting investors to take some risk off the table. Though the euro had moved higher against the greenback overnight, it now resides in the red as investors shed exposure to the common-currency unit.
On the economic release front, a weaker than expected Germany ZEW survey has added to the offer tone displayed by the euro, dropping from 41.9 to 31.5 and missing expectations of a 37.1 reading. It appears as if the uncertainty with the Greek situation and the overall health of the zone is beginning to take its toll on the future outlook of economic activity, causing the index to slide to its lowest level since November of last year. The pound is displaying some choppy price action against the big dollar this morning, initially caught in a downdraft after the retail price index and producer price index missed expectations and raised concern the consumer price index may struggle to move meaningfully back into positive territory in an imminent fashion. While the CPI reading on a y/o/y basis did manage to work its way out of the negative territory experienced last month, the 0.1% increase for the month of May was overshadowed by RPI and PPI prints, causing GBPUSD to initially slide lower before managing to recoup its earlier losses and now trades close to unchanged territory before the opening bell in North America.
Heading into the North American session, equity futures are still battling to emerge from the fog of pessimism that has engulfed overnight markets, though they still reside in negative territory. Commodity markets have witnessed a fairly uneventful overnight session, though WTI and Copper are both slightly offered as the North American session gets underway. The greenback is trying to muster out some gains ahead of tomorrow’s FOMC announcement, with the big dollar moving cautiously higher in the wake of mixed housing data. Housing starts for the month of May in the US missed expectations and fell over 11% from the excellent April print, though only eats up roughly half of the gains witnessed in April. The bright side of this morning’s housing data was that Building Permits continued on their steady upward trajectory and surpassed expectations with a fairly similar 11.8% increase. USDCAD is chopping wood around the unchanged mark post housing data, and we expect a fairly range-bound market heading into tomorrow’sFOMC rate decision where the board will likely try and walk the fine line of cautiously optimistic.
Further reading:
More Evidence Bunds Yields Are Topping Out – BofA Merrill
Where To Sell Euro Relief Rally? – Credit Agricole
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