Following a week in which the Chinese stock bubble popped and a weekend in which the Eurozone bubble followed, it was all up to central banks to stabilize the devstation that would follow should the Plunge Protection Team, now global, not show up.
And while US equities futures were looking grim overnight, China at least started off on the right foot, rising a little over 2% in early trading following China's scramble to stabilize markets as it knows the alternative could very well be (deadly) civil unrest. And then something unexpected happened: the market did not follow the Chinese central bank script. In fact, as noted earlier, stocks plunged tumbling as much as limit down for CSI-300 futs, and the SHCOMP crashing the most since 1996.
This was not supposed to happen: in fact, with China unleashing the bazooka of the double rate cuts, it was virtually assured that at least China's stock would rise as the rest of the world tumbled on Greek worries. That it did not was the biggest red flag, far more so than what the Greek referendum reveals this weekend, as it means that after Sweden last week, now China has lost control!
According to Paul Chan, chief investment officer for Asia ex-Japan at Invesco in Hong Kong, "China’s fourth interest-rate cut since November failed to stabilize the stock market as it was seen as a stopgap measure to stem a slide in share prices rather than an effort to revive the economy." He added that "It seems like policy makers are more worried about the stock market than about the real economy. The economy is slowing down and they are so much behind the curve in terms of easing. But as the stock market corrected, they jumped in, putting in all the policies. It gives people a sense of panic."
That's about right: and now with rate cuts no longer stabilizing the market which as revealed was the PBOC's only real motive, the next and final option for the Chinese central bank is QE, just as we predicted.
But until we get then, there is a question: what happens in the interim. Because at the open, Europe looked in the abyss, and with no help coming from China, it did not like what it saw:
- EURO STOXX 50 FUTURES FALL 7% AT MARKET OPEN
- DAX FUTURES DOWN 5%. CAC DOWN -5.3%
- GERMAN BONDS SURGE AT OPEN, 10-YEAR YIELD FALLS 20 BPS TO 0.72%
- ITALIAN BONDS DECLINE WITH 10-YEAR YIELD RISING 57 BPS TO 2.72%
- SPANISH 10-YEAR BONDS DECLINE WITH YIELD RISING 43 BPS TO 2.54%
And then the answer came from the Swiss National Bank, which stepped in to prevent the collapse just as Europe was opening. Because seemingly out of nowhere, a tremendous bid came in to life the EURCHF, buying Euros (against the CHF and the USD) and selling Europe's last left safety currency.
We now know that it was the SNB, the same central bank which is the proud owner of well over $1 billion in Apple stock.
- JORDAN: SNB INTERVENED IN FRANC OVER NIGHT
- JORDAN: SITUATION OVER WEEKEND MADE INTERVENTION NECESSARY
As the SNB president admitted: “There was an increased demand for francs” over night, Thomas Jordan says at conference in Bern. “The SNB intervened in the market to stabilize it.”
In other words, without the SNB, the situation would have been truly dire.
And this is only on Monday night: we now have 5 more days of agonizing wait until we get to the Greek rerferendum, which may not even happen because as German FAZ reports Greece may not even have the funds to hold the Greferendum!
To be sure before the week is done every single other central bank will have a go at stabilizing the "market" although if everyone else decides to sell, the Chinese contagion will spread as central bank after central bank loses market intervention credibility. At that point, it will be time to really get the hell out of Dodge.
A deeper look at markets, starting in Asia: PBoC cut interest rates for a 4th time in 7 months by 25bps with the lending rate lowered to 4.85% and the deposit rate lowered to 2.00%, while it also cut the RRR rate by 50bps for banks which lend to agricultural and small and medium sized businesses and by 300bps for Non-banking financial companies. (China Economic Net)
Asian equities plunged as participants react to the latest developments in the Greek crisis, while losses in the Nikkei 225 (-2.9%), ASX 200 (-2.2%) and Hang Seng (-2.6%) were exacerbated by weakness in financials. Shanghai Comp (-3.4%) yet again traded in erratic fashion, as the index entered bear market territory having fallen 20% from its June 12th highs, with the PBoC's decision over the weekend to cut interest rates by 25bps months failing to provide a sustained rally in the index. Finally, JGB prices jumped by 39 ticks with USTs rising by over a point as safe havens benefited from a widespread risk-off tone.
Weekend developments in Greece have dominated headlines and market moves this morning, with Greek PM Tsipras announcing a referendum on 5th July and imposing a bank holiday for the week. For a full roundup of developments in Greece please click here. This saw European equities (Euro Stoxx: -3.1 %) open the session in negative territory, with FTSE (-1.4%) and SMI (-1.0%) outperforming as the UK and Switzerland are not members of the Eurozone. On a sector specific basis, financials are lagging with some Italian banks failing to post as opening price.
While fixed income markets have seen Bunds trade around 175 ticks higher, fears of contagion have not been realised despite analysts at Goldman Sachs forecasting that Italian and Spanish spreads would widen by 150-175 bps against the German benchmark, but have instead widened by around 30bps and have come off their worst levels throughout the morning.
EUR initially weakened substantially as a result of the collapse in Greek talks, with many concerned not only with the possibility of a Grexit, but also the risk of contagion to other European periphery nations. This saw EUR/JPY fall as much as 460 pips as the impact on the cross was intensified due to safe haven flows into JPY. However the European open saw a less severe impact on European periphery bonds, with the Spanish and Italian 10Ys both widening against the German benchmark by around 30 bps, substantially less than the 150-175 forecast by Goldman Sachs, leading to EUR paring back much of its losses, bolstered by the limited contagion. As a result EUR/JPY traded lower by 180 pips and EUR/USD lower by around 60 pips heading into the US open.
Away from Greece, EUR/CHF saw an uptick this morning after SNB's Jordan stated that the central bank has active in the FX market overnight emphasising the potential for the SNB to step in to weaken the CHF. Also of note, supporting EUR this morning is the regular month-end related buying of EUR/GBP by Buba.
The USD opened higher today but has fallen throughout the European session to trade lower by around 0.8% amid JPY strength stemming from safe haven flows. Elsewhere, Fed's Dudley (Voter, Dove) has stated that a September rate-lift off is 'very much in play' amid stronger US data.
Looking ahead, today US Pending Home Sales as well as German CPI, with regional CPIs so far printing lower than expected. Participants will also be looking out for comments from EU'S Juncker at 1145BST/0545BST although a European Commission spokeswoman has already stated that no new proposals will be presented.
Gold (+ USD 3.10) strengthened overnight as a consequence of safe haven flows, however the yellow metal has come off its best levels throughout the European morning to trade back below USD 1180. The energy complex has seen weakness so far this morning with an Iran nuclear deal appearing close ahead of the deadline tomorrow, combined with concerns regarding China after the aforementioned weakness. Also of note CFTC oil speculators lowered their WTI net long positions by 5,314 contracts to 238,274 in the week to 23rd June.
In summary: European shares fall, though are off intraday lows, with the autos and banks sectors underperforming and basic resources, health care outperforming. Stoxx 600 falls as much as 3.2%, most since Oct. 15 Greece imposes capital controls, Athens stock exchange trading suspended until bank holiday over. Germany’s bonds surge most since 2011, Greek yields rise. China’s stocks fall 22% from this year’s June peak, entering bear market. The Spanish and Italian markets are the worst-performing larger bourses, the U.K. the best. The euro is weaker against the dollar. Commodities decline, with nickel, Brent crude underperforming and copper outperforming. U.S. Dallas Fed index, pending home sales due later.
- S&P 500 futures down 1% to 2075
- Stoxx 600 down 2.1% to 388.5
- US 10Yr yield down 13bps to 2.34%
- German 10Yr yield down 13bps to 0.79%
- MSCI Asia Pacific down 2% to 144.9
- Gold spot up 0.2% to $1177.4/oz
- All 19 Stoxx 600 sectors drop; basic resources, oil & gas outperform, autos, banks underperform
- Asian stocks fall with the Kospi outperforming and the Shanghai Composite underperforming; MSCI Asia Pacific down 2% to 144.9
- Nikkei 225 down 2.9%, Hang Seng down 2.6%, Kospi down 1.4%, Shanghai Composite down 3.3%, ASX down 2.2%, Sensex 0.6%
- Euro down 0.6% to $1.11
- Dollar Index up 0.24% to 95.7
- Italian 10Yr yield up 14bps to 2.29%
- Spanish 10Yr yield up 14bps to 2.25%
- French 10Yr yield down 9bps to 1.21%
- Greek 10Yr yield up 377bps to 14.62%
- S&P GSCI Index down 1.3% to 429.9
- Brent Futures down 2.3% to $61.8/bbl, WTI Futures down 2.1% to $58.4/bbl
- LME 3m Copper up 0.3% to $5773/MT
- LME 3m Nickel down 4.7% to $11870/MT
- Wheat futures down 0.1% to 567.3 USd/bu
Bulletin headline summary from Bloomberg and RanSquawk
- Markets react to latest Greek developments with PM Tsipras calling for a referendum & week long bank holiday seeing weakness in EUR & equities, while PBoC cut rates for the 4th time in 7 months
- Greek referendum announcement sees European equities trade firmly in the red with EUR also weaker, while periphery bonds have not suffered as much as expected due to limited contagion
- PBoC cut interest rates for a 4th time in 7 months by 25bps with the lending rate lowered to 4.85% and the deposit rate lowered to 2.00%, while it also cut the RRR rate by 50bps for banks which lend to agricultural and small and medium sized businesses and by 300bps
- Today US Pending Home Sales and German CPI, with comments also expected from EU'S Juncker at 1145BST/0545BST.
- Treasuries surge, led by 7Y and 10Y, as Greece shut its banks and imposed capital controls in an announcement designed to avert the collapse of its financial system, heightening the risk it will be forced out of the euro.
- History suggests capital controls hardly ever work; while dozens of countries have imposed such measures since World War I, the IMF found that only those few with sound economies and strong institutions succeeded in slowing capital flight
- The Greek government plans to ask voters on July 5 whether they accept the latest proposal by creditors on implementing budget cuts in return for more financial aid, and advocates a “no” vote
- Markit iTraxx Europe CDS index surged by as much as 20%, the most since Lehman in Sept. 2008, to 80bps
- Morgan Stanley sees Greek EUR exit now as base case, with odds at 60%; RBS sees 40% odds of Greece leaving EUR
- Chinese stocks tumbled, sending the benchmark index into a bear market, as signs of an exodus by leveraged investors overshadowed the central bank’s effort to revive confidence with an interest-rate cut
- Chinese regulators are considering suspending IPOs to stabilize the country’s tumbling stock markets, people familiar with the matter said
- With two days left in Puerto Rico’s fiscal year, the cash- strapped commonwealth is struggling to pass a budget that would allow it to make payments on a $72b debt load that the island’s governor said is unsustainable
- Sovereign 10Y bond yields lower with the exception of peripheral EU; Greece 10Y +379bps, Italy, Spain and Portugal yields also higher. Asian, European stocks plunge, U.S. equity-index futures decline. Crude oil lower, copper and gold slightly higher
US Event Calendar
- 10:00am: Pending Home Sales m/m, May, est. 1.5% (prior 3.4%)
- Pending Home Sales y/y, May (prior 13.4%)
- 10:30am: Dallas Fed Mfg Activity, June, est. -16.9 (prior -20.8)
DB's Jim Reid concludes the overnight recap
Well, well. What a week we have ahead. If the drama around the upcoming Greek referendum and the weekend Chinese rate cut are not enough then we have the confusion of an extra second being added to world time at midnight GMT tomorrow - the first time this has been done during international trading hours. The variability of the earth's rotation will play second fiddle to the ongoing Greece saga though.
Before we dig into all the details, a snapshot of markets this morning shows the expected sell off. However there is no panic yet and bourses are generally trading better than where they opened the Asian session. The Nikkei (-2.18%), Hang Seng (-2.68%), Kospi (-1.35%) and ASX (-2.18%) have all fallen though, while S&P 500 futures are around -1.49% as we go to print. The Shanghai Comp is -3.75% although markets in China have been particularly volatile once again with the PBOC rate cut muddying the waters. In bond markets, 10y Treasury yields are 17.0bps tighter at 2.303% and at the lows for the session. 10y yields in Australia (-13.9bps), Japan (-2.4bps), South Korea (-3.4bps) and New Zealand (-7.1bps) have also taken a leg lower, while credit indices in Asia, Australia and Japan are +7bps, +8bps and +6bps respectively, although all traded as much as +10bps wider on the open. In FX markets the Euro is 1.48% lower versus the Dollar at $1.1002 (touching $1.0955 briefly), while the single currency is also down against the Yen (-2.45%), Aussie Dollar (-1.42%), Swiss Franc (-1.39%) and Sterling (-1.21%).
So let's quickly recap the news and then delve into some of the issues. Tsipras has called for a referendum on the 'final' EU bailout offer (which was never actually formally finalised) to be held next Sunday (5th July). Ironically any agreement that might have been available expires tomorrow night so it will become largely hypothetical by then. It is also a pretty vague question being asked and one that leaves it open to interpretation what citizens are in effect voting for. A yes vote will actually probably only start a new round of negotiations with what would be seen as a discredited government - assuming they survive.
Tsipras is campaigning for a no vote. In response to the weekend news the ECB has capped the ELA at Friday's levels. After the current program expires tomorrow night all eyes will be on whether the ECB actually suspends the ELA, effectively deeming the Greek banks insolvent. There will be little going back if they do so we would expect them to just keep the cap for now until the vote is made.
Meanwhile, shortly after 3am local time in Greece, the Greek government as expected issued a decree closing banks and imposing capital controls on the back of the ELA decision. Banks are set to be closed until July 6th with cash withdrawals at ATM’s limited to €60 per day. At the same time, any bank transfers or payments abroad are set to be banned. The move confirms earlier comments from Piraeus Bank CEO Thomopoulos following a crisis meeting of Greek government and finance officials earlier on Sunday and also comes following various reports of long queues at ATM’s and petrol stations as well as suggestions that 500 of the country’s more than 7000 ATM’s had run out of cash by Saturday morning.
There are going to be lots of technical questions as a result of this move to referendum and what seems certain to be a non-payment to the IMF tomorrow. Will it immediately be termed a default? Will it lead to a cross-default on EFSF loans, GGB and Greek CDS? It might not immediately (the EU for starters might wait until after the referendum) but the debate will start. However I think it’s important not to get too bogged down in the technical details at this stage as surely the likely result of the referendum is going to be the most important event this week and ahead of this the perception as to the result.
On this, it’s likely that we start to see a number of polls pop up this week which will get the market debating. There was plenty of attention on two polls in particular in the Greek press on Sunday morning which showed support for making a deal with Greece’s Creditors at 57% in the Alco Poll for Proto Thema and 47% (with No's at 33%) in the Kapa Poll for To Vima, although the latter with a carefully worded question based on making a ‘new painful agreement’. It’s worth noting however that these polls were run prior to the announcement of the referendum and so are somewhat outdated. It’ll also be important to caution against the questioning in any upcoming polls with the government likely to campaign emphasizing the negative aspects of an ‘austerity package’, while the opposition will likely stress the equivalence of a euro exit and so as a result it’s likely that we see different segments perceiving the question differently. Whoever is more effective as getting their interpretation across may help swing the vote.
In the meantime, the IMF and EU will surely tread a careful path and whilst they will want to make it painful this week for Greece they won't want to cut them off completely. Indeed Merkel has been strangely quiet so far which may reflect a desire not to antagonise a delicate situation. Overall the EU are likely to try to show the voters that things have taken a turn for the worse (without making any irreversible decisions) and give them a glimpse of the chaos that might arise at the end of the week if they don't vote yes?
DB’s resident expert George Saravelos notes however that even the consequences of a yes vote are far from certain. Finance ministers on Saturday highlighted the important credibility issues that would arise from Greek government implementation of an agreement it campaigned against. A change in government therefore and a cabinet of national unity - possibly under the pressure of a continuously strained banking system – may well be the most the likely outcome, however any agreement would have to happen fast given the accelerating impact of the crisis on the economy.
In terms of markets could this be a big test of the poor liquidity that there is at the moment. I'm sure most clients in Europe would like to lighten up on risk this morning and buy the safe havens but there are some markets (like European credit) where this will likely to be very difficult to do efficiently. I wouldn't expect panic at the moment but this could be a test of the new regime of awful secondary market liquidity.
One important factor to consider will be the ECB’s reaction function this morning. We’ve already got verbal evidence of support following the ELA decision with the associated statement including such rhetoric as ‘determined to use all instruments available within its mandate’ and the bank is ‘closely monitoring’ market conditions. Given the tools available, specifically QE, it’ll be interesting to see if we get an aggressive response from the ECB in the market this morning. It would certainly be a statement of intent from Draghi should he feel the need to accelerate asset purchases.
A personal view is that this story won't get too out of hand unless we start to see any evidence that the Greek's are likely to vote No on Sunday. At this point the sell-off could get messy. If this doesn't happen the negativity may well be contained even if the story will be far from over.
Of course, the other news story over the weekend came out of China where we got the news that the People’s Bank of China has cut the one-year benchmark lending rate and deposit rate by 25bps to 4.85% and 2% respectively. At the same time, there was also an RRR cut of 50bps for some banks who’s lending to rural borrowers and small and medium-sized enterprises is over a certain threshold, while there was a 300bps RRR cut for financing companies. DB’s Zhiwei Zhang, noted that the cuts were more than he expected and believes that the recent equity market sell-off triggered the action. Zhiwei notes that his baseline forecasts remain the same, that being another interest rate cut and a broad-based RRR cut in Q3 of this year. He does however note his concerns around the downside risks to the economy, particularly in 2016. Zhiwei believes that the government is following a strategy of leveraging the equity market to boost economic growth, which although helped in Q1 (through a boost from the financial service sector), is showing signs of volatility now which may pose risks to growth in the future. He notes that if the equity market drops significantly, the contribution from the financial service sector to GDP growth may return to its historical average or even lower.
Backtracking to markets on Friday, there wasn’t a whole to report as markets largely traded to the tune of what are now mostly redundant headlines concerning Greece. In Europe the Stoxx 600 (+0.12%), DAX (+0.17%) and CAC (+0.35%) all finished modestly firmer on the day, while Greek equities closed +2.03% higher in what is expected to now be the last trading day for the ATHEX before the referendum on Sunday. Equity markets were slightly more mixed in the US as the S&P 500 finished (-0.03%) more or less unchanged while the Dow (+0.31%) was a tad higher. In bond markets meanwhile, yields had drifted steadily wider with 10y Treasuries and Bunds +6.4bps and +6.1bps respectively. It was a similar story in peripherals meanwhile as Italy, Spain and Portugal ended +6.0bps, +4.5bps and +3.4bps respectively. There was little to report on the data front other than an upwardly revised June University of Michigan consumer sentiment reading, with the final print revised up 1.5pts to 96.1bps.
Headlines dominating Greece are set to be front and centre this week, however elsewhere we’ve also got a busy week for the data docket and we start this morning in the UK with consumer credit and money supply data before we get a range of confidence indicators out of the Euro area shortly after. German CPI is due this afternoon before we pass over to the US where pending home sales for May will be the highlight, shortly followed by the Dallas Fed manufacturing activity index. Tuesday starts in Japan where we’re expecting housing starts and cash earnings data. It’s a busy day in the European timezone with French PPI and consumer spending, German unemployment, the final Q1 UK GDP print and Euro area CPI and unemployment readings all due. In the US on Tuesday we’ve got more house price data with the S&P/Case Shiller house price index, while the ISM Milwaukee, Chicago PMI and June consumer confidence reading are all due. It’s a busy start in Asia on Wednesday where we see the Q2 Tankan survey out of Japan, shortly followed by the manufacturing and non-manufacturing PMI’s for China. The final June manufacturing PMI’s are also scheduled to be released in the Euro area, Germany and France on Wednesday while we’ll also get the latest revision for the UK. It’s a busy session in the US on Wednesday when we get ADP employment change data for June, Challenger job cuts, manufacturing PMI, ISM manufacturing and prices paid, construction spending and finally vehicle sales. Euro area PPI kicks off Thursday morning shortly followed by the latest ECB minutes from the June 3rd meeting. In the afternoon however we get the week’s main data event with US payrolls for June, as well as jobless claims, average hourly earnings, ISM NY and factory orders. We end the week on Friday in the Asia timezone with services and composite PMI readings for China and Japan. We’ll also get these for the Euro area shortly after as well as for Germany and France. The latest revision for the UK will also be due. Euro area retail sales rounds off the releases with the US closed for Independence Day. Fedspeak wise Bullard is scheduled to speak.
Stand by for a hectic week.