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By Oren Laurent
President, Banc De Binary
On Friday, July 10, global stock markets from New York to London, Hong Kong and Shanghai rallied on the back of news that Greece is making serious concessions to come to an agreement with European creditors. This follows the July 5 referendum which sent markets into a tailspin and investors reacted emotionally, without considering the market fundamentals.
Shares on the LSE, NYSE, NASDAQ and Dow Jones rallied on Friday after taking their cue from similar gains across Europe. The rally that began in Europe and China soon spread across the Atlantic and generated bullish sentiment in the U.S. and the U.K. The ‘equity bubble’ that many analysts warned of in China appears to be less of a concern given the constructive actions taken by Chinese regulators to stem the declines and reverse the losses. However, analysts have pointed out that the average Chinese investor is not deeply invested in stocks, with an estimated 15% of the typical portfolio comprising equities.
The measures adopted by the Chinese included halting trading on over 50% of equities, setting up a multi-billion dollar emergency fund with fund managers, relaxing regulatory conditions and preventing new IPOs. Combined, these initiatives helped to reverse weeks of losses in Chinese equities and to restore confidence to the global markets. The Hang Seng Index rallied by over 2.1% on Friday and the Shanghai Composite Index rallied by 4.5%. Since China is the world’s largest consumer of commodities, it is especially important how the Chinese stock markets perform as the spill-over effect is detrimental to copper prices, crude oil, iron ore, and agricultural produce, etc. The real concern however is how poor equity performance will impact on overall consumption in China.
Meanwhile in Europe, the IMF, EC and ECB are signalling greater optimism after Greece approached creditors with a bailout and repayment proposal. The Mediterranean country has been emboldened by the July 5 referendum, but it is clear that Greece wishes to remain in the eurozone with the euro as its currency unit. To this end, the Greek Prime Minister Alexis Tsipras presented his government’s plans for austerity measures, tax hikes, cuts to pensions and a 3-year bailout deal amounting to almost EUR 60 bln. An agreement with creditors could supersede the July 20 repayment of EUR 3 bln due to the ECB. The French Prime Minister Francois Hollande is confident that a Grexit can be avoided, but the Germans are more circumspect.
Several measures put forth by Greek Prime Minister Tsipras include the following:
• 23% standardised VAT;
• Removal of solidarity grant for pensioners by 2019;
• Removal of 30% tax break for Greece’s wealthiest islands;
• Continuance of EUR 60 daily withdrawal limit at Greek banks;
• Increased taxes on shipping companies;
• EUR 300 mln in cuts to defence spending by 2016;
Kneejerk reactions to equity market shocks are not uncommon. However, it should be noted that the fundamentals of the Chinese market are sound. That China has been transitioning from an export-driven market to a consumer-centric market is an important strategic change. The Chinese government has many powerful tools at its disposal to arrest further declines and spur economic growth at a rate of 6.5% to 7% for the year. With regards to Europe, the ECB is equally adept at using a wide range of resources to instil confidence in the region. “Quantitative easing” measures are but one such tool available. The low oil price is certainly a catalyst for economic growth.
