Insights

China and Greece unnerve markets, as US rates rise

13 August 2015

China and Greece continued to unnerve world stock markets in June, with the former gripped by a vicious market slump and the latter continuing to play out its modern tragedy of economic collapse and borrowing new money to pay back old loans, in an increasingly desperate attempt to stay in the Eurozone.

Shanghai hits the skids

The major developed market could not ignore the twin influences, although the crash of the Chinese stock market makes events in Greece look trivial. From its peak in mid-June, the Shanghai stock market plunged 30%, losing about $US3.9 trillion ($5.2 trillion) in market capitalisation – an amount more than the total annual output of Germany, and 16 times Greece’s gross domestic product.

July actually saw a 16% cent rally in the Shanghai Composite Index, as the Chinese authorities responded forcefully with market-support mechanisms, but the rally was snuffed out by a fall of more than 8% on July 27 – the Shanghai market’s biggest daily fall in more than eight years. The Shanghai index ended the month down 14%.

Athens back in business

Greece entered July having just achieved the dubious distinction of having become the first developed nation to default on the International Monetary Fund (IMF). The country’s ruling Syriza coalition then infuriated its Eurozone partners by holding another referendum, asking its voters to vote on whether to accept the bailout terms Greece’s creditors were offering.

Greece’s European partners warned that the referendum is effectively a vote on whether Greece stays in the euro or returns to the drachma – that a ‘No’ vote would be seen as a vote to abandon the euro.

Of course, when the Greek electorate called that bluff and proceeded emphatically to vote ókhi (no), it transpired that it was not actually the end for Greece as a euro user: Greece's fellow states in the 19-nation Eurozone said they were willing to open talks on a new €85 billion (US$93 billion) rescue package over three years – in what would be Greece’s third bailout package in five years – after Athens approved a series of tax hikes and economic reforms in July.

Amid a backdrop of violent demonstrations, Greece got a new loan from the Eurozone’s crisis fighting fund, enabling it to repay more than $6.5 billion in loan payments to the European Central Bank (ECB) and the IMF. The country also reopened its banks, which had been shut since late June.

The restart in negotiations on the third bailout package gave markets some respite from a seemingly unceasing flow of bad news from Athens. The Stoxx Europe 600 index rose 4% in July, its best monthly performance since February. Elsewhere in Europe, the DAX gained 3.3%, the CAC added 6.1% and the FT-100 edged 2.7% higher.

US rates poised for long-awaited hike

The major US indices also managed to move higher over the month. The Nasdaq Composite Index was the best performer, up 2.8% for the month - its best month since a 7% surge in February. The S&P 500 index gained nearly 2% in July for its second-best monthly performance of the year, behind February’s 5.5% rally, while the Dow Jones Industrial Average posted a 0.40% gain for the month.

The US markets were heartened by a reported expansion in US GDP at an annual rate of 2.3% in the April-June period. Although this was slightly below the consensus estimate of 2.5%, the GDP ‘print’ was taken as supporting the case for the Federal Reserve to raise interest rates this year, for the first time since December 2008. Markets are now preparing for a US rate rise this year – possibly as early as September.

As the US currency strengthens in anticipation of this, the weaker A$ is buttressing the local economy, a much-needed support in the wake of falling commodity prices, which have been led lower by oil – crude lost nearly 21% in July, its worst month since October 2008, at the height of the financial crisis. Commodity prices are reacting to a slower Chinese economic growth rate, as is market sentiment.

During the month, the S&P/ASX 200 gained 4.4%, as the market headed into full-year FY15 earnings season, in which it is expected that the resources stocks will drag down market earnings growth, despite an improved performance from the industrials, which will benefit from the weaker A$.

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