ASX at the close

Chris Weston, Chief Market Strategist at IG Markets

The three main macro issues at the centre of markets this year all come into full effect this week, with China, Greece and US economics all dominating news flow.

The monthly US jobs report is announced on Thursday, with expectations of 230,000 jobs created. Still, traders will be more concerned with Greece and China, as another solid payrolls report is hardly going to alter the fact Chinese authorities seem genuinely concerned by the massive equity deleveraging. The European Monetary Union is also in complete disarray.

For many the weekend was spent trolling through various headlines from key EU creditor personnel to find out what exactly was happening, not just around the referendum, but also Greek banks’ capital controls. We now have a good understanding of the controls in the Greek banking sector, but the referendum is just filled with so many implications – especially if they vote ‘yes’ – which I personally suspect they will. New polls just released for Proto Thema showed 57% of participants said they would vote in favour of agreement, even if it meant further austerity.

A ‘no’ vote is a straightforward rejection of the EMU. However, it is clear that the current Greek leadership is not compatible with the EU’s top dogs. There seems a strong disconnect between remaining in the union with Tsipras and Varoufakis providing direction and the EU providing any aid, which is of course the area we most need to see a new proposal re-established! A ‘yes’ vote is therefore where the confusion lies and this seems the most likely outcome.

Naturally, confusion leads to selling and volatility, and this is exactly what we saw on open. FX markets were a trader’s first port of call and EUR/JPY immediately kicked in with a monster 400 pip sell-off. S&P futures were sold close to 2% on open, but have recovered somewhat, which has driven some buying in Aussie and Japanese shares, but both markets are getting smashed today and look highly vulnerable to further selling – a short seller’s favoured hunting ground.

Safe haven buying has really been limited to fixed income, with a solid 15-basis point move lower in US treasuries futures. Gold has done very little (currently up $8) and you really have to look at it in EUR terms to get any real performance.

Still, despite calls from some (including the Austrian finance minister) that a ‘Grexit’ is inevitable, mass panic selling hasn’t resulted. That could still change, although the European open is shaping up for sizeable drawdown.

It seems that we are in for a period of underperformance from European equities and for that it is worth looking at the Eurostoxx/S&P 500 ratio. This has moved from a ratio of 1.76x to 1.89x in the last couple of months (I’ve looked at both markets in AUD terms). It seems logical that the ECB will promote a firm commitment to provide liquidity but, given the uncertainty, we could see Europe resume a period of underperformance and this ratio head lower. This is in line with a one-standard deviation move from the regression line drawn since the highs from 2008.

Still, it’s the moves in Chinese equities which have been talked about and the bulls won’t be pleased that after the PBoC injected RMB650 billion into the economy (through its weekend easing measures), markets have peeled back earlier gains to resume the two-week drop. The bears will say this is a clear sign that the Chinese markets have another 20% downside. Calls from the Chinese central bank to stop selling and start buying again hasn’t materialised and there is no doubt this is a bearish development.

It promises to be a very interesting session in Europe and I think a number of Asia-based traders will be keen to see the European reaction before putting money to work. One thing which has already started working nicely is volatility, with one-month implied EUR/USD volatility spiking 26% to the highest levels since 2011. The Eurostoxx and S&P 500 VIX should also see a strong move higher as well, as traders seek put protection.

Elsewhere expect a significant widening of Italian and Spanish spreads relative to German bunds (i.e. long German debt, short peripheral bonds), while EUR/JPY and EUR/GBP look like a sell on a squeeze higher into this morning’s gap.

Comments

  1. The Traveling Wilbur

    To those kind souls who posted today about bond market movements (thereby reminding me there are such things), I thank you from the bottom of my superfund. We’ll see how that works out come Friday.

    (Insert smiley with constipated expression here.)

  2. StomperMEMBER

    SMACKDOWN ROUND 2

    Aka @Cruella gets SCHOOLED

    Round Two of the @Stomper v @Cruella smackdown concluded this morning at the NSW Civil and Administrative Tribunal (NCAT) with battlelines drawn earlier in the month with submissions from both parties providing a combined 110 pages of evidence.

    @Cruella’s claim consisted of four items totalling $720 made up of:
    – “cleaning” for premises not done to her “standard” $120
    – “damage” to the bathroom vanity top $150
    – “damage” to doorways and architraves $200
    – “damage” to a kitchen door $150

    Our position was that she had no basis of claim with respect to the first three items and that the fourth was suspect – we had offered a small settlement for that issue to go away but this had been rejected by the Landlady.

    After navigating security, which consisted of a bag search and electronic detection, by the Syrian looking security guard, we took our places at NCAT hearing room 1.

    Shortly after @Cruella’s agent and her ball-less husband arrived but somewhat disappointingly no @Cruella who, we were advised, was unable to attend due to a funeral (BULLS***!!!). Nevertheless, we were all fired up and after exchanging pleasantries meandered into the tribunal room to meet our fate.

    The arrival of the Commissioner brought me some relief as he looked like the older brother of Garth Turner from http://www.greaterfool.ca fame.

    First up was Mr @Cruella with his embellished evidentiary position – and what a work of fiction it was. Based on his evidence you would be left thinking that Mr and Mrs Stomper had been running the local bikie club house. When I cross examined him with my Atticus Finch persona he ducked and weaved better than Alexis Tspiras in front of a hearing of European Creditors. (Note – Mr and Mrs @Cruella are Greek) and offered a weak explanation as to why he had not provided further particulars that I has requested earlier in our sparring. These included details of when the bathroom vanity had been last resurfaced, when the doorways had been painted and when the kitchen had been installed.

    We then proceeded to outline our case, which included:
    – Photographs of the house on exit
    – Copies of our end of lease cleaning contractor’s invoice (including scope of work)
    – Details of how to maintain a wooden vanity top in a wet area (hint it needs a waterproof finish applied every year or two)

    The Garth Turner lookalike then proceeded to ask Mr @Cruella some very probing questions. You could see him squirm in discomfort reminiscent of his last prostate examination. His answers backed him into a corner and his position was being undermined with each utterance.

    Finally the “verdict”.

    On the count of the cleaning, he said that the evidence of the photographs was compelling and that the level of standard required was that the premises are left in reasonable condition. “You cannot pick out spots of dust or grease to say the premises aren’t clean” he said. 1-0 to the Tenants.

    On the count of “damage” to the bathroom vanity top, he said “It is not the tenants responsibility to sand, varnish and maintain the bathroom vanity, that is the responsibility of the landlord” 2-0 to the Tenants

    On the count of “damage” to doorways and architraves he noted that the landlords own photographs showed the poor condition of the doorways and that chips to paintwork constituted fair wear and tear. 3-0 to the Tenants

    On the count of the “damage” to a kitchen door he found that in all likeliness the scratch was the result of negligence by the tenant (it was possibly caused by our 20 month old son and his trolley of carnage) and therefore he ruled on the favour of the Landlord. Final result 3-1 to the tenants.

    A moral victory in the fight of good versus evil and a schooling for the landlady from hell.

    And the irony of it all is that for $150 she would have spent over $1,000 in agents costs and other disbursements when she could have walked away day one with the settlement we had originally offered.

    Schooled @Cruella SCHOOLED

  3. Great result Stomper, and amusingly reported too! Imagine the thousands of tenants who get dudded because they don’t have the time or energy to pursue an issue like this. You are my very best hero for today. Well done! I’m delighted that the greedy woman lost money and time on this, and hope with all my heart that the bikies do set up a meth lab there next time. I am proud of you.

  4. PantoneMEMBER

    The bloodening continues!

    SGH down another 25% on the news that there is no news!

  5. Why are only the Greens in NZ concerned?

    “Why is it Groundhog Day? Back in 2011, I wrote a seriously messy blog post about dodgy New Zealand FSPs (Financial Services Providers), their dodgy web sites and people and addresses, and the evidently nonexistent oversight of all of this by the NZ Ministry of Economic Development and the NZ Companies Office. To my surprise, this report appeared in the New Zealand Herald soon after:

    Green Party co-leader Russel Norman recently questioned Power about New Zealand International Savings & Loan Ltd, which is New Zealand registered with its registered office at 9/22 Curran Street, Herne Bay, has its sole director – Rodrigo Edgardo Alvarado – located in Panama, and its shareholder listed as the Stockholm-based Eurocapital New Zealand Limited Partners SA.

    Norman was alerted to the company by a Naked Capitalism blog. On its website New Zealand International Savings & Loan says it offers banking services as a registered financial services provider in New Zealand.

    Naked Capitalism got its name check via Gareth Vaughan, a New Zealand journalist, who, ever since 2011, has been publishing a stream of stories, better informed and better organised than mine, about the continuing insanity of New Zealand FSPs.

    Nearly four years later, the politicians, the name of the Ministry, the governing laws and the regulators have all changed, but here I am, still blogging ineptly about FSPs. The parliamentary questions continue, too:

    7024 (2015). James Shaw to the Minister of Commerce and Consumer Affairs (09 Jun 2015): What action, if any, has he taken to ensure the London Capital NZ and affiliated company Asian Finance Corporation are operating in accordance with the law?

    Hon Paul Goldsmith (Minister of Commerce and Consumer Affairs) replied: I am advised that London Capital NZ Limited was deregistered as a financial service provider on 7 March 2013. Asia Finance Corporation Limited is still currently registered as a financial service provider. The Financial Markets Authority is in the process of reviewing, under section 18B of the Financial Service Providers (Registration and Dispute Resolution) Act, Asia Finance Corporation Limited’s registration.

    For context, the founder director and 100% shareholder of both London Capital (NZ) and Asia Finance Corporation is Bryan Leonard Cook. His Asia Finance Corporation (AFC), now subject of a parliamentary question, is easily as dodgy as New Zealand International Savings & Loan ever was, back in 2011. In fact, it’s much, much dodgier: AFC is a key component of the giant international Virgin Gold scam, which has cost offshore investors hundreds of millions of dollars, or more.”

    http://www.nakedcapitalism.com/2015/06/groundhog-day-for-nz-fsps-bryan-cook-of-asia-finance-corporation-is-a-crook-but-does-nzs-fma-care.html

    Skippy… a good lib or lab would surely figure out how to make it all go away for a few bob.

  6. What the fucking is going on with SLR, lol
    Either they are going bankrupt, or they are a screaming buy surely

    I have been following this saga for so long now

    • Yes, it seems odd. Could be the holding charges on Murchison mine?
      Still, at near its year low it seems like a good buy to me, especially since what Newcrest did today.

    • Van Eck had recently exited their position. Because of the gigantic volume, the flow on effect will be felt for some time.

    • Once at 3.50! Ouch. I’m sitting on a cost base of about 30c for a tiny punt – they’re a reasonable acquisition target at some point (or a total loss).

      But NCM is forgiving all sins at 30%+…

  7. And what don’t we know ? …

    China’s Auditor Says State Firms Falsified Revenue and Profit – Bloomberg Business

    http://www.bloomberg.com/news/articles/2015-06-28/china-s-auditor-says-state-firms-falsified-revenue-and-profit

    Fourteen state-owned companies, including State Grid Corp., Cosco Group and China Southern Power Grid Co., falsified 29.8 billion yuan ($4.8 billion) in revenue and 19.4 billion yuan in profits, the National Audit Office said in a statement on its website Sunday. The office issued its 2014 work report Sunday, along with several statements and audit reports for individual companies. … read more via hyperlink above …

    • China;s top auditor warns of local debt risks: Xinhau … Asia One

      http://news.asiaone.com/news/asia/chinas-top-auditor-warns-local-debt-risks-xinhua

      BEIJING – Some Chinese local governments are struggling to repay debt the country should have “an early warning” system to control debt risks, the country’s top auditor was quoted as saying on Sunday.

      China has been trying to deal with a mountain of local government debt – a legacy of unbridled spending during the global financial crisis, which was estimated by the audit office at 17.9 trillion yuan (S$3.71 trillion) at the end of June 2013. … read more via hyperlink above …

  8. The standard definition of money is in error.

    The standard definition of money is given in terms of its three functions:

    1: Money is a medium of exchange.
    2: Money is a measure of value.
    3: Money is a store of value.

    Number 1 is at best misleading. Numbers 2 and 3 are simply wrong, and these things are easy to show. It is also easy to show that this is important.

    First, the actual definition of money:

    1: Money is a token, or instrument, of demand, which is exchanged for goods or services. Or simply: Money is demand.
    2: Money is a measure of demand.
    3: Money is a store of demand.

    http://www.nakedcapitalism.com/2015/06/the-standard-definition-of-money-is-in-error.html

    Skippy… and the natives went wild….

    • Really 2 and 3 of the standard definition are obviously problematic – but a definition of money as a means of exchange seemed kinda workable. But this is a much more elegant definition – money as a means for comparison of demand just takes away that subjective notion of value that it doesn’t deserve. It also shows just how flexible a medium it can be and how those seeking to use as a store of value/demand are very reliant on the rules for its production.

      “Money, then, is an instrument for comparing the demand for dissimilar objects. However, we have shown it is not reliable for comparing the value of dissimilar objects.”

    • It is possible that everyone underestimated the contagion this time about – everyone believing the ECB has it hand.

      Banks in Italy looking shaky – really all that ugly circular debt is still there. Maybe the bondholders get the haircut they thought they could just shaft the punters with…

    • There is not a doubt in my mind about this. It is disgustingly brilliant, as their massive profits are hidden in plain site with all the Aussie RE specufestor boganaires.

  9. BIS Report … Cheap debt fueled and politically convenient illusory booms not welcome

    The world is defenceless against the next financial crisis, warns BIS – Telegraph

    http://www.telegraph.co.uk/finance/economics/11704051/The-world-is-defenseless-against-the-next-financial-crisis-warns-BIS.html

    … extracts …

    “Mr Caruana said that during booms, workers and capital are shifted to slow-growing sectors, with a “long-lasting negative” impact on productivity growth. “Misallocated labour needs to move from these sectors to other parts of the economy,” he said. …

    … Mr Caruana said that policymakers must now focus on the supply side of the economy, introducing the right reforms, rather than continue to lean on debt which will inevitably undermine growth.”

  10. Wall Street falls as Grexit fears grow, volatility spikes – Yahoo Finance

    http://finance.yahoo.com/news/wall-street-falls-greek-crisis-140412475.html

    Oil hits three-week lows as Greece crisis worsens; eyes on Iran – Yahoo Finance

    http://finance.yahoo.com/news/oil-prices-fall-greek-imposes-031500020.html

    Greece could face social unrest soon: Wilbur Ross – Yahoo Finance#

    http://finance.yahoo.com/news/ecb-forced-greek-people-decide-120442984.html#

  11. Chinese investors told how to think …

    http://www.zerohedge.com/news/2015-06-29/chinese-regulator-blames-ongoing-market-crash-rumors-demands-traders-act-rational

    After soaring exponentially over 100% in the past 12 months, amid spiking margin debt for illiterate farmers and housewives, Chinese regulators appear upset that their stock market ‘wealth creation’ model is failing hard. CSRC just released a statement clarifying why it is happening (“clearly profit-taking”); who is to blame (“The Government hopes investors can make independent judgement; Don’t believe or follow negative rumors against Chinese economic development,”); and what to do next – Buy because it has “ample liquidity to meet investor needs.” The regulator ends with a stunner – demanding investors “act rationally.” … read more via hyperlink above …