Market commentary: Investors caught up between Greek crisis, Chinese stock market meltdown

Markets on Friday morning rallied after a new proposal from the Greek Government was submitted to the country’s creditors for approval. Following an 11-hour marathon, Prime Minister Alexie Tsipras has put together a “constructive” deal proposal that seems to meet the large majority of the reforms requested by Greece’s creditors on June 26th, while requesting a new bailout valued at €53.5 billion. 

Despite the people of Greece having largely rejected more austerity measures by voting No at a referendum on Sunday 5th July, the new proposal seems to go in the opposite direction by agreeing to undergo substantial budget cuts, to increase taxes and to reform a pension system that was bleeding money from every side. In exchange for Greece continuing on the path of austerity and fiscal tightening, an increasing share of creditors have begun to recognise the need to discuss some sort of debt relief in order to make the country’s long term debt sustainable.

Although there is a recognition that Greece cannot realistically move forward without addressing its debt load, which today stands at 170% of its GDP, a straight forward haircut may still be far away, as German Chancellor Angela Merkel has still to be convinced to approve such a drastic measure.

European equities jumped at the opening of trading this morning, with the German Dax Index rising 1.8% points, the FTSE 100 gaining 1.14% points and the Euro Stoxx 600 Index advancing around 1.6%. Equity futures also point to a strong opening for US stocks with contracts on the main three equities indexes gaining close to 1.11% each.

European Peripheral Sovereign bonds received a boost, with spreads on the reference 10 Years papers of Italy, Spain and Portugal tightening, while investors abandoned the flight to safety represented by the German Bunds, whose prices declined pushing yields higher.

The Euro has also gained on the back of the news surrounding the submitted Greek proposal. The Euro spot exchange gained 1.29% returning above the 1.1160 level, while the US dollar weakened against the Euro currency, but appreciated 0.84% against the Japanese Yen.

If the Greek situation may be finally moving toward a resolution, investors are looking with increasing concern towards China, its slowing economy and routing stock market. Following 4 weeks of declines, Authorities and private brokers borrowed a few moves from the US open market economy’s play book and undertook unprecedented steps to boost stock prices and calm equity markets, which had already burnt through billions of Yan in lost market capitalisation.

After fire selling in June and reassured by the Government’s intervention aimed at halting the free falling stock prices, domestic investors returned to buy Chinese equities underscoring the biggest two-day rebound since 2008.

While most of institutional and international investors had moved out of the Chinese market just before the recent down turn, analysts at Goldman Sachs have actually hinted that, following the large correction that brought one of the most overvalued market into bear territory, China may have now become a buying opportunity.

Asian equities gained across the board overnight, with the Hong Kong, Australia and Shanghai Indexes advancing 2.08%, 0.39% and 4.5% respectively, while the Nikkei 225 was modestly negative losing 0.38%.

This article was issued by Paolo Zonno, Trader/ Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.