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U.S. a Relative Sea of Calm Amid Greece, China Tumult

8 July 2015 in Trading Ideas

Global financial markets have recently been force fed a pair of volatility-inducing events, neither of which happen to reside within the borders of the United States.

For several weeks now, the goings-on in Greece have been at the top of the worry list for investors of European equities as well as the stocks of companies with significant European operations.

On Sunday, Greek voters rejected a plan by the country’s European creditors who were offering a bailout but at the steep price of austerity for Greek citizens for the foreseeable future.1

As the New York Times explained, while the referendum may have lifted the popularity of Greek Prime Minister Alexei Tsipras and bought some time to return to negotiations, Greek banks are almost out of cash and are expected to stay closed for at least several more days.

The government decided on Monday that a bank holiday scheduled to end Tuesday would be extended through Wednesday, and a daily cap on ATM withdrawals of 60 euros — about $66 — in place since last week, could be tightened. Long lines formed again at cash machines in Athens on Monday as people continued to take out money in small increments, the Times reported.

For its part, the European Central Bank said it would maintain emergency loans to Greek banks at about 89 billion euros, a level that keeps them from failing but doesn’t keep them from running out of cash they can issue to depositors within a few days, the Times said.

However, the central bank also said it would tighten requirements for collateral that Greek banks must post in return for loans. The decision means that, even if the European Central Bank decides to increase the lending limit, Greek banks might not have enough collateral needed to qualify for more emergency cash.

And, as the Times pointed out, the bigger issue continues to loom: If a deal for emergency financial aid or a reduction of the nation’s mountainous debt is not struck soon, Greece will probably default on international loans this month, and paying civil servants and pensioners will be increasingly problematic. Should Greece run out of euros in the absence of a deal, it could soon be forced to issue a parallel currency or IOUs to pay its domestic bills, leading it out of the euro currency.

Given a possible sovereign debt default and currency exit, the roller-coaster that has been Chinese stock performance in recent days may seem small, but one could argue that the financial impact is potentially more significant.

Over the weekend, a group of 21 Chinese brokerages pledged on Saturday to commit 120 billion yuan ($19.3 billion) to a large-cap stock fund, designed to stabilize shares after the biggest three-week rout in the Shanghai Composite Index since 1992.2

Bloomberg’s Matt Levine quoted one analyst as saying “this 120 billion yuan won’t last for an hour in this market,” but Levine noted if it could be levered — possibly by borrowing from the government — it may have more impact.3

The Shanghai and Shenzhen stock exchanges also halted initial public offerings, which to Levine is surely a symbolic gesture. “Who would do an IPO in this market, which is down 25+ percent since mid-June?” he asked.

On the other hand, the theory is impeccable, said Levine. “If you want to stop a stock market decline, you should (1) mandate buying and (2) ban selling.”

While those measures could ultimately work, one could also excuse investors for wanting to avoid the country’s equities until stability appears to have surfaced.

U.S. investors wanting to steer clear of the flux in both Europe and China could consider staying close to home, where stocks have been generally no worse than sideways and economic data, including recent jobs figures, appears to be showing incremental progress.

The All-American motif, for example, is a portfolio of stocks of companies that derive 100 percent of their revenue from within the US. The motif has fallen 1.1 percent in the past month. In that same time, the S&P 500 has declined 1.2 percent.

Over the past 12 months, the motif has gained 4.6 percent; the S&P 500 is up 4.2 percent.

1Liz Alderman and Jack Ewing, “Germany Maintains a Hard Line on Greece Debt After Vote,” nytimes.com, July 6, 2015, http://www.nytimes.com/2015/07/07/business/international/yanis-varoufakis-abruptly-resigns-as-greek-finance-minister.html.

2Keith Bradsher and Chris Buckley, “China’s Market Rout Is a Double Threat,” nytimes.com, July 5, 2015, http://www.nytimes.com/2015/07/06/business/international/chinas-market-rout-is-a-double-threat.html.

3Matt Levine, “Greek Voters and Chinese Hairdressers,” Bloomberg.com, July 6, 2015, http://www.bloombergview.com/articles/2015-07-06/greek-voters-and-chinese-hairdressers.

  1. Paul holtz
    8 Jul at 5:20 am

    I’m in the U.S. Near Dallas. I’m safe here.