With the Greek leadership coming empty handed to yesterday’s emergency summit to discuss Greece’s future within the Eurozone after Sunday’sreferendum, yet another financial meltdown is making headlines. This time in China, as Beijing’s multiple attempts to prop up a devastating slide in Chinese equity markets have come to naught. Since their mid-June peak equity markets in both Shanghai and Shenzhen have fallen more than 20% with the Shanghai market closing down 5.9% in yesterday’s session even after extraordinary moves by both the government in Beijing and the indexes themselves to stem the losses as Chinese investors lose faith in the ability of the government to stabilize asset prices. In response overnight more than half of the almost 2,800 companies listed on the Shanghai and Shenzhen exchanges have now suspended their shares from trading with these share suspensions constituting about 40 per cent of China’s market capitalisation. Given the backdrop of a rapidly slowing real economy and an opaque financial system that is over burdened with debt these developments in China have the potential to overshadow the crisis in Europe should chaos in the equity markets begin spread to other parts of the Chinese financial system. The reaction in currency markets has the yen up versus both the big dollar and the sterling while the kiwi and the aussie dollars are taking diverging paths against the greenback with the NZD on a stronger footing while the AUD slides as the dim prospects in China continue to knock on commodities.
Moving onto the other major crisis facing markets, European capital markets are taking a rather sanguine attitude with respect to the fear of a potential contagion from the Greek crisis. In the last few days bond yields in the periphery countries of Spain, Portugal and Italy have actually decreased signalling that unlike 2012 fears of the broader consequences of a Grexit have for a large part dissipated. When looking at the developments in Europe over the last three years this makes sense, as the ECB’s asset purchase program has had a massive impact on supporting European bond prices and many of the potential transmission mechanisms of the crisis in Greece to the broader financial system have now been eliminated with the ECB, IMF and ESM holding the majority of Greece’s debt. With this in view, the euro has maintained its tight trading band with the USD, trading slightly higher than yesterday while it has gained nearly 50 basis points against the sterling in the last 12 hours as European equity markets are posting gains on the hope that Greece’s most recent bailout request made in the last hour finds favour with Eurozone officials. Outside of the Eurozone, the sterling is on a sharply weaker footing versus the other majors including the yen and euro despite a budget announcement today that pins growth in the UK to come in at 2.6% for 2015.
Prior to the resumption of North American trading, the USD has lost some of its lustre, trading weaker versus both the yen and the euro over the course of the last 24 hours. While the FOMC meeting minutes released later today will provide context for subsequent moves in the buck, right now traders are positioning themselves for a session which equity futures indicate will be start off slow. With Canadian building permits missing expectations by a large margin, posting nearly a 15% decline, along with continued weakness in Canadian economic data and soft pricing within commodity markets there is a risk that the loonie will continue its slide against the USD especially as market participants begin to bet on a potential rate cut on the part of the Bank of Canada next Wednesday. With that being said even with a lack of significant economic data until Friday’s job number the rest of the week is shaping up to be an eventful one.
Further reading:
US Treasury Secretary: Europe must restructure unsustainable Greek debt
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