Equities
Greece: Equity markets have been very volatile over the last fortnight with Greece continuing to dominate the news. At the last minute a deal with creditors was agreed. There remains, however, doubt as to the sustainability of the solution and Greece’s long term ability to pay. The IMF in particular is skeptical on this last point and believes Greece needs some debt forgiveness. As part of the deal the level of VAT in Greece will rise from 13% to 23%. Greek banks, although re-opened, still have limits on money withdrawals and bank transfers.
Global equity markets have risen strongly and consistently on the news but are still well below the highs reached before the crisis erupted.
China: The Chinese stock market had fallen over 30% over the previous four weeks with investors worried that the sums of money involved could have global consequences, so global equities had traded lower on such fears. However the market has been much more stable over the past week and indeed is 18% above its recent ‘crash’ lows’. The Chinese authorities intervened heavily in the market to reverse the slide by imposing a ban on stock sales by major shareholders as well as forcing state owned banks to lend as much as USD 200 Billion to ease liquidity shortages.
Fixed Income
The Greek deal obviously helped Greek bonds with 10 year bonds falling to an 11% yield from 18.5%. Other European bond markets also performed well, especially those on the periphery of the Eurozone , with Spanish 10 year yields falling 20 basis points ( 0.20%) to finish well below the 2% yield barrier.(Remember: yields down means prices up and profits made for bond investors!). German Bunds were moderately better over the fortnight falling 7 basis points ( 0.07%) to 0.73% yield for the 10 year benchmark bond.
Foreign Exchange
The Euro hasn’t rallied much on the Greek news and focused more on comments from the ECB suggesting that the Eurozone Quantitative Easing (QE) program may last longer than previously thought.(More easing means lower interest rates which makes that currency less attractive on a relative basis to currencies with a firmer interest rate outlook).
The US dollar has enjoyed recent strength and is just below its 12 year high reached in March with the Federal Open Markets Committee (FOMC) still on track to raise interest rates this year if the economy continues to strengthen. The market has probably ‘priced in’ a 25 basis point (0.25 %) rate rise but the big global financial market question is “ How far will US interest rates rise and how fast!”
Commodities
Commodities are seeing waves of selling with the Continuous Commodity Index hitting the lowest level since early 2009.
Gold, Oil and Softs (agricultural commodities) all weaker. Some of the falls are speculative in perhaps nervous markets but fundamentals also at play:
-Oil prices are under pressure after an historic nuclear deal that traders feared could flood the market with Iranian crude.
-Gold has ignored Greek and Chinese turbulence and focused on the strengthening US economy and the rising US dollar.(With gold priced in USD, if the US Dollar rises then the price of gold must fall to maintain its same intrinsic worth!)
Misc.
US Banks continued to report second quarter earnings and most are seeing an improvement in their retail banking operations but trading revenues continue to be under pressure.
Equities
S&P 500: 2130
Nasdaq: 5200
Bonds – 10 Year Government Yields
US 2.38%
EU 0.73%
GB 2.05%
Foreign Exchange
USD/EUR 1.0870 (1 euro buys 1.0870 dollars)
GBP/USD 1.5600 (1 pound buys 1.5600 dollars)
Commodities
OIL: Brent: 56.00 (dollars per barrel)
GOLD: 1110 (dollars per ounce)
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Regards
Paul McCormick
