What the stock mar­kets think of Greece

Financial Mirror (Cyprus) - - FRONT PAGE -

On Fri­day, July 10, global stock mar­kets from New York to Lon­don, Hong Kong and Shang­hai ral­lied on the back of news that Greece is mak­ing se­ri­ous con­ces­sions to come to an agree­ment with Euro­pean cred­i­tors. This fol­lows the July 5 ref­er­en­dum which sent mar­kets into a tail­spin and in­vestors re­acted emo­tion­ally, with­out con­sid­er­ing the mar­ket fun­da­men­tals.

Shares on the LSE, NYSE, NAS­DAQ and Dow Jones ral­lied on Fri­day af­ter tak­ing their cue from sim­i­lar gains across Europe. The rally that be­gan in Europe and China soon spread across the At­lantic and gen­er­ated bullish sen­ti­ment in the U.S. and the U.K. The ‘eq­uity bub­ble’ that many an­a­lysts warned of in China ap­pears to be less of a con­cern given the con­struc­tive ac­tions taken by Chi­nese reg­u­la­tors to stem the declines and re­verse the losses. How­ever, an­a­lysts have pointed out that the av­er­age Chi­nese in­vestor is not deeply in­vested in stocks, with an es­ti­mated 15% of the typ­i­cal port­fo­lio com­pris­ing eq­ui­ties.

The mea­sures adopted by the Chi­nese in­cluded halt­ing trad­ing on over 50% of eq­ui­ties, set­ting up a multi-bil­lion dol­lar emer­gency fund with fund man­agers, re­lax­ing reg­u­la­tory con­di­tions and pre­vent­ing new IPOs. Com­bined, these ini­tia­tives helped to re­verse weeks of losses in Chi­nese eq­ui­ties and to re­store con­fi­dence to the global mar­kets. The Hang Seng In­dex ral­lied by over 2.1% on Fri­day and the Shang­hai Com­pos­ite In­dex ral­lied by 4.5%. Since China is the world’s largest con­sumer of com­modi­ties, it is es­pe­cially im­por­tant how the Chi­nese stock mar­kets per­form as the spill-over ef­fect is detri­men­tal to cop­per prices, crude oil, iron ore, and agri­cul­tural pro­duce, etc. The real con­cern how­ever is how poor eq­uity per­for­mance will im­pact on over­all con­sump­tion in China.

Mean­while in Europe, the IMF, EC and ECB are sig­nalling greater op­ti­mism af­ter Greece ap­proached cred­i­tors with a bailout and re­pay­ment pro­posal. The Mediter­ranean coun­try has been em­bold­ened by the July 5 ref­er­en­dum, but it is clear that Greece wishes to re­main in the eu­ro­zone with the euro as its cur­rency unit. To this end, the Greek Prime Min­is­ter Alexis Tsipras pre­sented his gov­ern­ment’s plans for aus­ter­ity mea­sures, tax hikes, cuts to pen­sions and a 3-year bailout deal amount­ing to al­most EUR 60 bln. An agree­ment with cred­i­tors could su­per­sede the July 20 re­pay­ment of EUR 3 bln due to the ECB. The French Prime Min­is­ter Fran­cois Hol­lande is con­fi­dent that a Grexit can be avoided, but the Ger­mans are more cir­cum­spect.

Sev­eral mea­sures put forth Tsipras in­clude the fol­low­ing: - 23% stan­dard­ised VAT;




Min­is­ter -Re­moval of sol­i­dar­ity grant for pen­sion­ers by 2019; - Re­moval of 30% tax break for Greece’s wealth­i­est is­lands; - Con­tin­u­ance of EUR 60 daily with­drawal limit at Greek banks; - In­creased taxes on ship­ping com­pa­nies; - EUR 300 mln in cuts to de­fence spend­ing by 2016;

Knee­jerk re­ac­tions to eq­uity mar­ket shocks are un­com­mon.

How­ever, it should be noted that the fun­da­men­tals of the Chi­nese mar­ket are sound. That China has been tran­si­tion­ing from an ex­port-driven mar­ket to a con­sumer­centric mar­ket is an im­por­tant strate­gic change. The Chi­nese gov­ern­ment has many pow­er­ful tools at its dis­posal to ar­rest fur­ther declines and spur eco­nomic growth at a rate of 6.5% to 7% for the year. With re­gards to Europe, the ECB is equally adept at us­ing a wide range of re­sources to in­stil con­fi­dence in the re­gion. “Quan­ti­ta­tive eas­ing” mea­sures are but one such tool avail­able. The low oil price is cer­tainly a cat­a­lyst for eco­nomic growth.


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