Market View; World Stock Indexes & Trading Journal - page 25
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Today, attention will focus on the publication of economic indicators that will help investors to shape their expectations for future interest rates. The agenda of this week does not provide for the publication of first-line indicators, with the exception of GDP, whose new calculation will be announced on Friday.
European markets deal in consolidation after the fall of the stock exchanges in yesterday’s session. Markets can now benefit from the recovery in commodity prices, especially the price of crude oil and copper.
Central Europe stock markets will be more positively influenced, by the Greek situation than conditioned negatively by the appreciation of the Euro. Theoretically, if the prospect of improving investors regarding the Greek situation should enhance the Euro it is therefore reduced the perceived risk of the eurozone.
After months of deadlock, the news reported by the Greek authorities that pointed to a breakthrough appeared to be the decisive step to a solution. However, this advance was categorically denied by several European leaders, thus constituting an unexpected setback in this process. Apparently, the “triumphant” message of the Greek negotiators was reported in the press even before the start of the meeting with the European partners. According to CNBC, negotiations will resume on Sunday, date the Greek authorities said they would announce the agreement. These advances and setbacks can make the investors more skeptical in relation to real advances that negotiations can achieve.
In the pre-opening, European markets were trading with slight gains, benefiting from the positive closing of the Asian indices. Today will be published the final reading of the PMI index (Purchasing Managers Index), which should confirm that the eurozone economy is recovering at a solid but steady pace, based on the ECB’s action, the depreciation of the Euro, the price decrease of oil and revive domestic demand in some. In the coming days investors’ attention will remain focused on the Greek situation. The talks between the leaders of this country and its creditors resumed yesterday. According to the first reports, the talks began with the traditional Greek optimism and skepticism of its European partners. On Saturday, Interior Greek Minister, which did not participate in the meetings, said he believed an agreement will be reached before the June 5 repayment deadline of a IMF loan to Greece. The Greek Minister of Economy shares this optimism but warned that his country does not have a backup plan (or plan B). Yesterday, was scheduled a video conference between the Greek leaders, German and French, in order to facilitate the conclusion of an agreement through political means.
The Greek issue has caused a sharp increase in volatility and an intention to many fund managers to protect themselves from a possible negative surprise. In fact, the volatility of European indices May reached levels only recorded in January. This uncertainty with regard to Greece, which is causing the growth in volatility has also induced much fund managers to resort to buying puts (put options) to protect their portfolios. If hypothetically is not reached an agreement for Greece, most likely the European indices will fall, generating losses in the portfolios of investment funds. However, these losses would be offset by the increase in the value of the puts that were purchased.
In the beginning of the session the European markets traded with some gains. Continuing Greece as center stage of the current situation, it’s creditors will present today a final proposal. It was reported that the proposal should include reforms of the labor market and the pension system, privatization and changes in the functioning of the public system. The outline of this proposal should be submitted today to the Greek Prime Minister when he meets the President of the European Commission. This document represents a change compared to recent months as constituting a joint proposal from creditors, signaling that the differences between the IMF and European leaders were exceeded. This union increases pressure on Greece, whose authorities had indicated divisions among lenders as the main cause for the failure of negotiations that extend for months. A spokesman for Syriza said that if no agreement is reached until Friday his country will not repay the IMF. Today will take place the meeting of the ECB, a extraordinarily Wednesday. The ECB meetings are scheduled on Thursdays, a total of 8 meetings per year. Until last year, the meetings were held monthly and always at the first Thursday of the month. As tomorrow is a holiday in Germany (Corpus Christi) and the ECB is based in Frankfurt, the meeting was brought forward to today. At the press conference that integrates the meeting, Mario Draghi should not depart significantly from the general lines of the previous meeting, reaffirming economic forecasts and analyzing the first effects of the debt purchase program. During the press conference Mario Draghi will be questioned about the situation in Greece but will likely adopt a diplomatic stance.
Asian markets closed lower. The central theme of the session was the drop in Chinese equities. The Shanghai Composite was losing more than 5% before recovering part of the losses, devaluing about 3% by 7:00 a.m. (GMT). One reason for the decline was the news that one of the largest brokers in the country would reduce the amount of loans given to retail investors. Many of these investors fund to invest, depositing a collateral (margin) which is just a portion of that funding. Thus, exposure to the equity market is well above the capital of these investors, which exponentially increases the potential either gains or losses. The volatility of the Chinese stock market is typical of a market that has moved away from fundamental economic and moves almost solely due to the liquidity created by the central bank. Sometimes these situations lead to quite abrupt and sudden corrections.
European markets started the session slightly lower. Yesterday, Greece announced that it will not now repay 310 M.€ to the IMF, and also advance that can concentrate the payment of the remaining 1300 M.€ that has to be carried out during June at the end of the month. The Greek Prime Minister said that the proposal of creditors does not constitute a starting point for an understanding. This decision does not imply a breach or default. The infringement procedure is often long and complex. The first consequence of a failure to pay the IMF will suspend any additional funding to Greece. However, this institution provides the debtor a “grace period”, which extends to the end of month, during which debts can be settled. The issue regarding payment of today is not so much be considered a default or not but the signaling that is sent to financial markets.
After the opening, European markets negotiate without major fluctuations. The situation in Greece should continue to capture the attention of investors. An exchange of accusations between the European Commission President Juncker and Prime Minister Tsipras took place during the weekend. While the second set as “unacceptable” proposals of creditors, Jean-Claude Juncker argued that these proposals were distorted by the Athens authorities. The European indices will be influenced by the outcome of these negotiations (which are usually accompanied by news, rumors and denials), the Euro’s behavior and the evolution of yields. Technically, investors will observe the support zone in the DAX located between 11150/11170. If this level is broken, the medium-term situation for the German index may be compromised.