Market commentary: Greece, China and the emerging market currencies

Overnight Asian equity markets, which had initially started the session in positive territory, turned into losses following concerns over China, a possible interest hike in the US and the news of another deadly plane crash in the region.

In Asia, China continues to make the news, after suddenly deciding to let markets play a much bigger role in pricing its currency, which resulted in an immediate 2.9% devaluation of the Yuan.

In addition to that, investors were also met by data showing how the second world largest economy had slowed down more than expected. The most recently released data seems to suggest that the Chinese economy expanded at 6.3% rate over the first six months of the year, far below from the 7% officially reported.

As a result, economists were prompted to update their full year estimations, now expecting the country’s GDP to grow at around 6.6%. Although the slowing down of the Chinese economy is not a new news, analysts are starting to forecast a bigger impact on global inflation and growth expectations, which are likely to be revised down.

Yesterday, US markets closed moderately higher on Monday, posting gains between 0.40% and 0.85% after an initial decline caused by disappointing manufacturing data for the New York region, which has declined at a faster rate since the last recession.

Stocks reversed initial losses throughout the trading session, supported by positive data showing increasing confidence among US homebuilders, which climbed to its highest level in a decade and prompted a rally in the sectors’ stocks.

While all homebuilder names rose across the board, KB Home stood out by gaining 3.2%, along with TopBuild Corp., which jumped over 5%. Health-care and consumer-discretionary names also performed well, with the S&P Health Care Services Select Industry index advancing 1.23% and the S&P 500 Consumer Discretionary Sector Index gaining 0.97%.

Today the US largest home improvement retailer Home Depot Inc. is due to report its second quarter’s results just before the opening bell, and analysts are expecting to see growing revenues and higher profit, fueled by consistent and widespread improvements in the US house market.

In Europe, the spot lights returned on Greece and its third bailout package that was finally agreed upon last week and is due to face parliamentary approval in five key Member States over the next two days.

The new agreement will provide the troubled Mediterranean country with an additional EUR 86 billion, that Greece is expected to use to meet maturing repayments, to partially refinance its crumbling banking sector and to keep its state bureaucratic machine alive. Most analysts bets that while the new financing deal package will buy Greece more time, a very little part, if any at all of the new funds will be actually used to support the country’s economy, which has lost over 25% of its GDP over the past five years.

With a large ECB repayment due on August 20, Greek Prime Minister is desperate to secure formal approval from Austria, Germany, Spain, Estonia and the Netherlands, as a default on the payment due to the ECB would almost certainly spur another selloff in Greek assets.

China and the approaching of a likely interest rate hike in the US have put substantial down pressure on several emerging markets’ currencies such as the Thai Baht, the Indonesian Rupiah and the Turkish Lira.

On Monday, a gauge tracking the 20 most traded emerging currencies declined 0.4%, extending previous losses and causing the MSCI Emerging Markets Index to drop as much as 1.1% to its lowest level since the fall in 2011. With some of their currencies in free fall, commodity prices constantly declining and oil prices at multi-year lows, emerging markets assets remain among the investors’ less favorite investments to hold.

This article was issued by Paolo Zonno, Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are 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.