Global Market Review
Stock Markets From Greece to China…..
The global stock markets trading lower for second week after the debt crisis in Greece reached a critical point. Most of the damage occurred on Monday, when the S&P 500 endured its largest one-day pullback since last October. Smaller-cap shares, which are typically more volatile, fell more than larger-cap stocks, and the technology-heavy Nasdaq Composite also underperformed the blue chip benchmarks.
Big news is still coming out of Greece as it failed to make IMF debt payment. European officials stated that they would be offering no additional funds to Greece, signaling a final impasse in the recent round of negotiations. Greek government responded by announcing a referendum on the European austerity demands, closing the nation’s banks and stock market for at least 10 days, and instituting capital controls to prevent assets from leaving the country. Referendum result was a big surprise for EU as 61% of Greeks voted against austerity. Stocks fell sharply at the open of trading on Monday and continued their decline through much of the rest of the week. VIX index, a measure of market volatility and fear, saw its biggest increase in two years. Trading volumes also surged, defying a recent pattern of relatively light activity.
The effect of the Chinese government’s tinkering with supply and demand dynamics continues to be a wild card in terms of its effect on the Australian stock market in both the short and long term. On the one hand, state-controlled iron ore producers increasing their supply has had tangible effects on global commodity prices and brought some of the higher-cost Australian producers to their knees. The S&P/ASX200 is trading at 5471.0, as did the All Ordinaries at 5456.3, rebounding from previous days losses as traders also took heart from better-than-expected domestic job numbers.
Shanghai composite, is now down over 27% from its recent peak. Such was the scale of the run up, key indices of Chinese equities remain up by double digits since the start of the year. But where to now? Although there were pauses on the way up, history suggests that now the tide has turned, further downside awaits. This latest evolution in share prices bears a striking resemblance to the rally in Chinese equities that started in 2007 and lasted throughout that year. The similarities are so great that the correlation between the two series is almost perfect.
Gold prices hovering around $1160, as investors continued to monitor developments surrounding Greece’s debt crisis and Chinese stock markets. Uncertainty over Greece has so far failed to spur increased investor demand for gold, often perceived as a safe-haven asset.
Iron ore prices in China plummeted more than 10% to $US44.59 a tone, their lowest level since 2009. At that price, most Australian miners would be producing at a loss, with the exception of low-cost giants Rio Tinto and BHP Billiton.
Crude oil prices continued to fall as global growth has been slowed with economic stress in China and uncertainty from Greece send traders to safe haven assets. Timing has also found the final negotiations with Iran coming at a time that it just compounds the huge global oil surplus. Crude oil trading around $52.40 while Brent oil at 56.57. The contagion from the crisis in Greece and the crash in China to other major securities markets so far has been relatively muted. The far greater impact appears to be in commodities, which have fallen hard this week. Losses have been across the board, from crude oil to copper. The Greek referendum, a potential nuclear deal in Iran, China’s economic foibles and heavy supply all conspired to torpedo oil prices. August crude fell 7.7% to $52.53 a barrel as oil futures fell to their lowest settlement in almost three months.
Reserve Bank of Australia made no mention of China in Tuesday’s monetary policy statement. The RBA left interest rates unchanged and predicted further exchange rate depreciation. Meanwhile the Australian dollar has broken a new six-year low as the US dollar rallies. The greenback is considered a safe-haven currency in times of stress and is strengthening on the back of global concerns. The US dollar remained higher against a basket of major currencies even after data showed that U.S. jobless claims rose to their highest level since February as markets were jittery ahead of fresh reform proposals from Greece. Fed’s June policy meeting released on Wednesday showed that policy makers need to see more signs of a strengthening U.S. economy before raising interest rates.
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