Tumbling Futures Rebound After Varoufakis Resignation; Most China Stocks Drop Despite Massive Intervention

More than even the unfolding "chaos theory" pandemonium in Greece, market watchers were even more focused on whether or not China and the PBOC will succeed in rescuing its market from what is now a crash that threatens social stability in the world's most populous nation. And, at the open it did. The problem is that as the trading session progressed, the initial 8% surge in stocks faded as every bout of buying was roundly sold into until every other index but the benchmark Shanghai Composite turned sharply red.

The reason the SHCOMP stayed above water is because China's sovereign fund Huijin was in the market to keep large caps like PetroChina, ICBC up. And then, shortly after it was announced that China's National Security Fund had ordered all of its managers "not to sell a single stock", the Composite briefly dipped into the red and the local Chinese bank was on the verge of a total loss of control.

Luckily, by the end of the session, the Composite managed a modest 2.4% recovery even as investors in the vast majority of Chinese shares suffered another day of losses and as the PBOC's credibility came this close to being fully wiped out.


Elsewhere in Asia, central banks were less forceful and the Nikkei 225 (-2.1%) fell to within close proximity to the 20,000 level while JPY strength further weighed on the index. ASX 200 (-1.3%) was dragged lower by weakness in the commodities complex.

And while China was a rollercoaster, Europe's volatility wasn't far behind: as was to be expected, the price action was dominated by the Greek 'No' vote victory, in turn prompting a risk-off tone which was observed overnight with US equity futures slumping 1.5% while T-notes gapping higher by over 1 point. However, the subsequent shocker that Yanis Varoufakis is to step down, citing preference of some Eurogroup participants, resulted in EUR and equity markets recovering off the worst levels. According to the latest reports, Greece's chief negotiator Tsakalotos is the favourite to replace Varoufakis as the Greek Finance Minister.

EUR/USD staged an impressive recovery overnight, largely supported by the resignation of the Greek finance minister and the upside in EUR/CHF driven mostly by another post-weekend day of relentless Swiss National Bank intervention. However, in recent hours the central bank bid appears to have fizzled and the EUR is once again grinding slowly lower as the selling wave appears to have overcome European central banks just as it did in China earlier.

Gold failed to hold onto early gains and trended lower overnight, before consolidating in negative territory in early European trade, amid the ongoing concerns over growth prospects in China. The drop in gold is due to further central bank intervention, this time by the BIS' FX and gold trading desk under the auspices of Benoit Gilson. At the same time, the risk averse sentiment weighed on the energy complex, with WTI and Brent Crude futures trading lower.

Notable energy stories:

Saudi Arabia has cut the OSP for Arab light crude to Asia in August by USD 0.10 per barrel, while increasing the price to European customers by USD 0.25 per barrel. (RTRS). Iranian Oil Minister Bijan Zanganeh will release a template for international oil contracts in the near future, as companies wait for deal that will open up one of the world's premier oil markets to foreign investment. (RTRS) FCC (36.9k bpd ) has been shut down at the CVR — Coffeyville refinery (155.7k bpd) having been recently restarted. (Genscape) The CDU (64k bpd ) and VDU (30k bpd) have been restarted at the Phillips 66 - Wood River refinery (306k bpd). (Genscape) The FCC (80k bpd) was shut down at the Valero — Port Arthur Refinery (292k bpd) (Genscape)

On the macro economic calendar today we have ISM non-manufacturing, and the Markit U.S. composite/services PMI due later but these will be absolutely meaningless in light of the headline Greeknado that simply refuses to go away.

In summary: European shares remain lower, off opening lows, with the banks and basic resources sectors underperforming and travel & leisure, health care outperforming. Varoufakis quits as Greek finance minister, Greeks voted “no” in Sunday’s referendum. Merkel to meet Hollande today ahead of emergency summit of European leaders Tuesday. ECB governing council due to talk today on support to Greek banks. Hang Seng index enters correction with 11% drop from April peak, Shanghai Composite rises.

The Italian and Spanish markets are the worst-performing larger bourses, the U.K. the best. The euro is weaker against the dollar. Greek 10yr bond yields rise; German yields decline. Commodities decline, with WTI crude, nickel underperforming and gold outperforming. U.S. ISM non-manufacturing, Markit U.S. composite PMI, Markit U.S. services PMI due later.

Market Wrap

  • S&P 500 futures down 0.6% to 2056.3
  • Stoxx 600 down 0.8% to 380.2
  • US 10Yr yield down 8bps to 2.3%
  • German 10Yr yield down 5bps to 0.74%
  • MSCI Asia Pacific down 2% to 143.5
  • Gold spot down 0.3% to $1165.1/oz
  • All 19 Stoxx 600 sectors fall
  • Eurostoxx 50 -1.5%, FTSE 100 -0.5%, CAC 40 -1.3%, DAX -1.2%, IBEX -1.6%, FTSEMIB -2.4%, SMI -0.6%
  • Asian stocks fall with the Shanghai Composite outperforming and the Hang Seng underperforming; MSCI Asia Pacific down 2% to 143.5
  • Nikkei 225 down 2.1%, Hang Seng down 3.2%, Kospi down 2.4%, Shanghai Composite up 2.4%, ASX down 1.1%, Sensex up 0.4%
  • Euro down 0.79% to $1.1026
  • Dollar Index up 0.37% to 96.47
  • Italian 10Yr yield up 9bps to 2.34%
  • Spanish 10Yr yield up 10bps to 2.31%
  • French 10Yr yield down 2bps to 1.22%
  • S&P GSCI Index down 3.3% to 419.4
  • Brent Futures down 2.3% to $58.9/bbl, WTI Futures down 4.3% to $54.5/bbl
  • LME 3m Copper down 3.2% to $5573/MT
  • LME 3m Nickel down 3.4% to $11595/MT
  • Wheat futures down 2.5% to 575.8 USd/bu

Bulletin headline summary from Bloomberg and RanSquawk

  • Risk-off tone was observed overnight with US equity futures slumping 1.5% while T-notes gapped higher by over 1 point, however subsequent reports that Greek finance minister Varoufakis is to step down prompted a recovery in riskier assets amid a glimmer of hope that a deal will be easier to reach.
  • EU's Juncker is to hold a conference with Tusk, ECB's President Draghi and Eurogroup Dijsselbloem on Greece. Furthermore, an EU summit will take place on Tuesday at 1700BST.
  • Going forward, market participants will get to digest the release of the latest US ISM-Non-Manufacturing report, Canadian Ivey PMI and also await any further developments surrounding Greece.
  • Treasuries gain, 10Y yield falls to touch 50-DMA at 2.271% as 61% of Greeks, more than forecast, voted against yielding to further austerity demanded by creditors.
  • Most Chinese stocks fell as a fresh round of government support measures, including suspending IPOs as brokerages pledged to buy shares and urged investors not to panic, failed to spark gains outside the largest state-run companies
  • Yanis Varoufakis quit as Greek finance minister, a move intended to help speed talks with creditors; “I shall wear the creditors’ loathing with pride,” he wrote in a blog post
  • Economists from JPM to Barclays Plc made a Greek exit their base scenario, while those at Goldman and Citigroup saw ways it can remain within the bloc
  • European officials are putting the onus on the Greek government to make the next move as Merkel heads to Paris today for talks with Hollande to map out a way forward for Greece
  • Help for Greece is possible on basis of ESM rules, which say states in receipt of aid must accept contractual conditions, German Finance Ministry spokesman Martin Jaeger said
  • Jaeger also said euro area has different sustainability assessment of Greek debt than presented last week by IMF, which said Greece needs at least $40b in new euro-area funds
  • Podemos, Syriza’s ally in Spain, said EU should guarantee Greek financial system, Troika must respect Greek sovereignty
  • Sovereign 10Y bond yields lower with the exception of EU periphery: Greece 10Y +300bps to 17.642%; Portugal, Spain, Ireland and Italy yields also rise. Asian stocks mostly lower; Shanghai gains 2.4%. European stocks fall, FTSE -2.1%. U.S. equity-index futures fall. Crude oil slides, WTI -4.4%, Brent -2.4%; copper -3.1%, gold -0.4%

US Event Calendar

  • 9:45am: Markit US Composite PMI, June final (prior 54.6); Markit US Services PMI, June final, est. 55.1 (prior 54.8)
  • 10:00am: ISM Non-Mfg, June, est. 56.5 (prior 55.7)
  • 10:00am: Labor Mkt Conditions Index, June (prior 1.3)

In conclusion, here is DB's Jim Reid with his view of this weekend's crazy events

Europe has perfected the art of muddling through over the last few years. With yesterday's 61% 'No' vote win in Greece, they will have to do it all again to ensure the status quo. For the wider global economy/macro markets, this doesn't yet feel anywhere near as scary as when Italy and Spanish 10 year yields were trading well north of 7% a few years back. It is however a major historic event and a Greek exit if it happens could have significant medium-long term ramifications on the survival of the Euro.

Before we delve deeper, let's first glance at the initial Asian market reaction so far. There’s been an unsurprising sell-off across risk assets this morning although much like last week the moves have been fairly well contained. The Nikkei (-1.98%), Hang Seng (-3.18%), Kospi (-2.05%) and ASX (-1.41%) are all more or less at their lows without being overly stressed, while S&P 500 futures are currently 1.3% lower. Credit markets are modestly weaker but have pared a lot of the initial early move wider. Having traded 7 to 8bps wider at the open, Asia (+5bps) and Aus (+4bps) indices have bounced back slightly. 10y Treasuries yields are 10.4bps lower as we type at 2.278% while similar maturity yields in Australia (-17.1bps), New Zealand (-7.5bps), Singapore (-2.8bps) and Hong Kong (-9.6bps) have followed suit. The Euro has slid -0.73% versus the Dollar to $1.103, again paring some of the earlier weakness (-1.3% at the Sydney open). The single currency is also -1.1%, -0.7% and -0.3% against the Yen, Sterling and Swiss Franc respectively. Trading to their own tune are China equities with bourses reacting to the measures announced over the weekend (which we detail later). Having initially opened nearly 8% higher, the Shanghai Comp has tumbled sharply, trading at +2.16% as we to print. The Shenzhen Comp (-2.59%) and CSI 300 (+2.52%) have been similarly volatile. So we need to keep an eye on this story this week as there's a danger Greece could distract us from what would otherwise be the main story.

Back to Greece for now though. Following the result, some important meetings have now been scheduled in response. An emergency summit of European leaders has been called for Tuesday. German Chancellor Merkel is said to be meeting with French President Hollande tonight. European Commission President Juncker is also set to hold a conference call with the ECB’s Draghi and Eurogroup President Dijsselbloem this morning while the ELA review is also due today. In terms of the political reaction so far, Dijsselbloem said in a statement that ‘the result is very regrettable for the future of Greece’ while German Vice-Chancellor Gabriel said that Tsipras has ‘torn down the last bridges across which Europe and Greece could have moved toward a compromise’. On the other side of the fence, Greek PM Tsipras was quoted shortly following the result saying that ‘the mandate you’ve given me does not call for a break with Europe, but rather gives me greater negotiating strength’.

This leads to the obvious question of where we go next? The starting point for most discussions will be the likelihood of a Grexit. DB’s George Saravelos noted on last night’s client call that despite the result, Grexit is not inevitable but ultimately depends on the political will following pressure on the ground in Greece. George believes that the probability of a Grexit is somewhere around 40% now. Another outcome path is a potential bank recap program eventually resulting in EU bank ownership assuming Greece remained in default, however this is probably less likely at this stage given the moral hazard implications. That leaves some sort of agreement as the other possible option, although the path to which is far from straightforward and likely to take some time.

Immediate focus now switches to the European response, starting with the ELA review today. We expect that the ECB will keep the current cap in place rather than any seeing an outright suspension. A suspension would effectively put the Greek banking system into immediate resolution and so moving Greece one step closer to exit, however we believe that it’s more likely that we wait and see the European political response first before such a move was contemplated.

With the result, it feels like Tsipras has bought himself a few more days before the economic reality of the situation catches up with him. By the end of the week we may see most ATM’s out of cash, massive pressure on the payment of upcoming public sector wages, tourism issues and wider economic damage. For that reason Tsipras will be keen to move quickly with his new found momentum, but the risk is that the relationship between Europe and Greece has been damaged so much that additional conditions need to be set before any negotiations around a possible ESM program can even begin. The stance that Europe takes from here will be critical in how things develop. Too soft a stance and there is the risk of moral hazard, too hard a stance (possibly by demanding government change) and we may remain at deadlock. So some sort of middle ground will need to be achieved if keeping Greece in the Euro is desired.

The negotiations for an ESM program are unlikely to be straightforward. George notes that an ESM program requires prior ECB/IMF assessment of financing needs/debt sustainability as well as Bundestag approval before talks around a Staff Level Agreement can even begin. He believes that a written letter from the Greek government on its commitment to continue negotiations along the prior path may be requested, or possibly even a broader negotiating team backed by cross-parliamentary support required. The rhetoric out of Tsipras may also be a play a part in how Europe ultimately chooses to react. Irrespective of this however, the need for greater fiscal commitments as well as the overall weakening commitment of the Europeans in recent months to negotiations will only make the process more difficult.

DB’s Mark Wall touches on another interesting possibility, that being a scenario whereby a collapse in the Syriza government (due to rising economic and political costs of a closed banking system) results in a new government of national unity being formed and resulting in an agreement on a new deal with Creditors. In such a case, an agreement would have to be based on a more balanced programme and probably along the lines outlined by the IMF in their latest debt sustainability report. Structural reforms would have to be well considered in exchange for a less growth-unfriendly fiscal consolidation and a commitment on a gradual debt relief based on implementation milestones. Political deadlock in the event of a new government failing to be formed (assuming Syriza resigned) is still a possibility under such a scenario however.

As we look ahead to European market open this morning then, the wait-and-see aspect (with regards to a European response) may mean markets are reasonably well behaved and revert to 'controlled risk-off' mode. The moves 7 days ago and for much of last week were fairly contained on the whole, however this may also reflect partly the view of a yes vote being favoured. It’s certainly possible that we see disorderly market behaviour should a Grexit appear to be more and more likely, in which case all eyes would turn to the ECB and specifically to their reaction function - most probably through front loading of QE.

There’s a lot to consider and the ‘no’ result certainly muddles the outlook. Over the next 24-36 hours however it’s likely that we stay in wait-and-see mode with the European response function most important right now. The latter part of the week could see bigger market moves one way or the other once we know where we stand on negotiations. Its a tricky one to call but both Mark Wall and George Saravelos still put the risk of 'Grexit' at less than 50%. If 'Grexit' does occur my personal view is that its more damaging for the longer-term than the short-term. Europe has ensured that direct contagion should be limited for now and more liquidity should help stabilise markets after any initial shock. However it will become a huge focal point in the future for any country with issues within the EU, especially if Greece finds some growth further down the line. This could be a catalyst for extreme politicians around the continent campaigning on the basis that there was an alternative to the Euro. We stress this is not for now but its potentially the biggest long-term consequence of a 'Grexit'.

Not to be outdone, China once again shared at least some of the headlines this weekend following an effort to stabilize equity markets. According to the nation’s two exchanges, 28 companies are said to have halted their IPO’s while the Securities Association of China also announced that a group of 21 brokerages will invest at least 120bn yuan in a stock market stabilization fund in a bid to support the market. Most importantly, the China Securities Regulatory Commission also announced ‘liquidity support’ from the PBoC and the China Securities Finance Corporation will also raise its capital to RMB100bn from RMB24bn previously. DB’s Zhiwei Zhang believes that a PBoC intervention in the equity market is not necessary to avoid a financial crisis in China. Zhiwei notes that the index is still one of the best performing markets in the world from a YTD perspective and that the economy is dominantly dependent on the banking sector rather that the equity market for financing. He notes that the exposure of the banking sector to the leveraged finance scheme in the equity market to be only around RMB300bn and thus it’s hard to make a case that there is systematic risk from the equity market selloff for the economy. At this stage there has been no statement from either the PBoC or the State Council. Zhiwei notes that what this does do however is that this heightens the uncertainty on growth and inflation beyond this year with the PBoC’s mandate becoming more obscure as it becomes involved in the equity market. A fascinating sideshow to Greece and one that might be the more important story medium-term.

Looking at this week’s calendar now. It’s a fairly quiet start to the week in Europe this morning with just German factory orders and Euro area investor confidence data due. Across the pond this afternoon in the US we get the final composite and services PMI’s for June, alongside the ISM non-manufacturing and the labour market conditions index. Moving to Tuesday, industrial production readings out of Germany and the UK will be the morning’s highlight, as well as the manufacturing production print in the latter. Over in the US we’ve got the May trade balance, JOLTS job openings and the IBD/TIPP economic optimism survey to look forward to. Trade data out of Japan kicks things off on Wednesday, before we get French business sentiment data in the European session. The focus however will be on the FOMC minutes of the June 17th meeting due out late in the session, while consumer credit data is also expected. Turning to Thursday, attention will be on the China CPI and PPI reports in the early morning. German trade data for May along with the BoE decision highlight the European session while in the US we’ve just got initial jobless claims due. Moving to Friday, Japan PPI and consumer confidence data are the only notable releases in the Asia timezone. Over in Europe we’ve got French industrial and manufacturing production, Italian industrial production and UK trade data and construction output. It’s a quiet end to the week in the US with just wholesale inventories expected. Earnings season kicks into gear meanwhile with Alcoa due to report tomorrow. On top of that, it’s a busy week for Fedspeak with Williams, Brainard, George, Kocherlakota, Rosengren and Fed Chair Yellen (on Friday) all expected.

For now its over to the European politicians!!