Greece goes to the brink - again

21 July 2015

Crises are supposed to be temporary, but the Greek crisis has now been dragging on for six years – as long as the Second World War. That’s how long investment markets have been dealing with the possibility that the Eurozone might lose a member. In the June quarter that possibility became more imminent than ever before, as it became clear that Greece and its creditors, led by the European Central Bank (ECB), could not agree on conditions that would see the creditors extend further aid to the country – and that consequently Greece, which had been granted permission to bundle several debt payments to the International Monetary Fund (IMF) into a single payment, due at the end of June, would not be able to pay it.

On the last day of June, Greece officially defaulted on the payment, becoming the first developed nation to default on the IMF. The brinksmanship in Athens pushed most European markets lower for the quarter – Greece’s own ATG being one of the few to emerge from the quarter in the green – and also dampened most major world markets.

Chinese stock market bubble bursts

Markets were also battered in June by what appeared to be a popping of a stock market bubble in China mid-month. The Shanghai composite index now lost more than 20% in three weeks in June, putting it into official correction territory, after it had more than doubled over the last year. This was despite the People’s Bank of China (PBOC) unexpectedly cutting interest rates in late June for the fourth time since November, and Chinese authorities deploying a range of measures to shore up prices – and confidence.

At quarter’s end, the rout was continuing apace, with reports that more than £2 trillion had been wiped off the value of Chinese-listed companies. The Shanghai Composite index gave up 7.2% in June for a quarterly gain of 14.1%, while its Shenzhen compatriot fell 11.8% in June, bringing its quarterly rise back to 25.8%.

In the US, the Dow Jones Industrial Average lost 0.88%, with a 2.2% fall in June tipping it not only to a quarterly loss, but to 1.1% decline year-to-date. The broader S&P 500 Index lost 0.23% for the quarter to be 0.3% lower year-to-date: the technology-heavy Nasdaq Composite was the best-performing of the major US indices, up 1.75% for the quarter, and it breached for the first time its 2000 point high, which preceded the ‘tech wreck’.

In Australia, the S&P/ASX 200 gave up 7.3% for the quarter, to be just 0.9% ahead for the year to date. The Nikkei 225 in Japan added 5.4% for the quarter, for a year to date gain of 16%.

China slows, Japan disappoints

The sharemarket falls in China are arguably not as concerning to the developed markets as the Middle Kingdom’s declining economic growth rate. China’s growth rate continues to moderate as the transition to what Beijing considers more sustainable growth - that is, oriented more to domestic consumption – consolidates; its official second-quarter annual growth rate stayed at 7%, the slowest pace since the global financial crisis in 2009, and the World Bank expects the growth rate to start with a 6 by 2017.

In Japan, the world’s third biggest economy disappointed in the second quarter with official growth widely expected to come in at zero, down from previous expectations of 1.5% annual growth, dragged down by a slump in net trade and weaker-than-expected consumer spending.

US GDP and corporate earnings revised higher

In the US, the economic recovery continued despite a weak first quarter, but there are caveats to this reading, eg. the ‘Frozenomics’ theory, which contends that severe weather in the first quarter of the year clouds the US economic data picture significantly (and makes the Commerce Commission a serial reviser).

This year, there was also a West Coast port strike to deal with which disrupted supply chains across the US. The upshot was that from an initial estimate of a 0.7% decline, US first-quarter gross domestic product (GDP) growth was revised upward during the second quarter to a decline of just 0.2% – a considerably stronger performance than first thought, and readily explicable by the combined effects of the severe winter weather; a strong US dollar cutting into export income, and the port strike.

In the second quarter, retailers reported strong sales in May and employers stepped up hiring, taking annual job growth above 3 million jobs per year for the past six months – a level last seen in May 2000. US average hourly earnings grew by 2.3% in the year to May, which is the highest level since 2009. Weekly jobless claims reached their lowest levels in 15 years in May. The strong jobs market finally seems to be translating into improved consumer confidence and a rise in spending growth.

While the US stock market was struggling to deal with the headline news emanating from Europe and China, there was also a significant revision occurring to corporate earnings estimates: at the start of the June quarter, data and analysis firm FactSet reported that analysts expected overall profits for S&P 500 companies to fall by 4.7% over the previous year. In fact, second-quarter earnings showed an annual rise of 0.8%, giving further credence to a strengthening US (and global) economy.

Australia stronger

At home, Australia’s March-quarter GDP report was released in the June quarter, coming in well above expectations. Over the first quarter the economy grew by 0.9%, giving an annual rate of growth at 2.3%. Analysts had been expecting a quarterly increase of 0.7%, to make an annual growth rate of 2.0%.

However, the outlook for business investment, both mining and non-mining, remains weak. Despite strong dwelling starts in residential construction – driven by a booming apartment market – the economy’s bright spot, the strength in housing is being offset by a decline in Australian engineering construction. Research firm BIS Shrapnel expects activity to fall 40% from its 2012-13 peak of $130.3 billion to $79.6 billion by 2017-18, due to the end of the mining investment boom and a lack of new state and federal government infrastructure projects.

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