GLOBAL MARKETS-China stock slide adds to Greek jitters; yen, bonds in favour

30 Jun 2015 | Author: | No comments yet »

Asian shares tentative, euro sags as markets eye Greece.

Asian shares edged up and the euro sagged in early Asian trading on Tuesday as Greece lurched toward defaulting on a looming debt payment, raising the likelihood of the cash-strapped nation’s exit from the euro zone. “All in all many in the market had already factored in the likelihood of Greece defaulting.The 19-nation currency had rallied from an almost one-month low on Monday on news reports that German Finance Minister Wolfgang Schaeuble said he did not view Greece as a contagion risk for the rest of the eurozone. “Right now the biggest surprise is that the euro is not materially weaker,” said Matthew Sherwood, head of investment markets research in Sydney at Perpetual.The benchmark rebounded over 117 points in early trade today, after two sessions of losses, on value-buying by investors in select blue-chips amid a recovery at Asian markets despite the ongoing Greece crisis.The quarter-percentage-point cut to interest rates and easing of reserve requirements for some banks was expected, she said, “but likely came in response to the ongoing, and relentless, decline in the equity market”.

Greek Prime Minister Alexis Tsipras stunned the world at the weekend by calling for a referendum on austerity conditions demanded by its creditors in exchange for bailout funds. The 30-share index recouped 117.80 points, or 0.42 per cent, to 27,762.95, with FMCG, realty, metal, consumer durables, healthcare and oil & gas sectors leading the recovery.

Photo: Reuters I can’t shake the feeling that I’ve spent the last five years watching the Grexit Special Edition Director’s Cut, and now the finale music is finally swelling. What is worrying is the volatility in the risk asset markets, which could impact currencies,” said Kyosuke Suzuki, director of forex at Societe Generale in Tokyo. On Monday, Tsipras implied that Athens would default on a 1.5 billion-euro debt payment due on Tuesday to the International Monetary Fund, a partner in the bailout with the European Commission and the European Central Bank.

Brokers said value-buying in select blue-chip stocks, coupled with a slightly better trend at other Asian markets after the previous day’s rout on Greece concerns, influenced sentiment here. Against the Japanese unit considered a safe haven in time of financial turmoil, the euro fell to 137.12 yen on Tuesday from 137.82 yen in Monday US trade. “While the latest opinion polls point to a ‘yes’ vote, we suspect that Greek people may ultimately vote ‘no’ when faced with the pension cuts etc. that this requires,” it said. “And they may not even get that far if the expiry of the bailout and failure to repay the IMF today result in the ECB cutting off emergency liquidity assistance for Greek banks. Westpac senior currency strategist Richard Franulovich said “fear and uncertainty over the consequences of next week’s referendum” would see Greeks accelerate efforts to get their cash out of the nation’s banks. That’s not unusual for financial crises, mind you; to haul out a Rudi Dornbusch quote I’ve used many times before: “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought. …

Asian investors were also nervously awaiting the reopening of China’s markets after stocks plunged further on Monday, taking losses to more than 20 percent since their mid-June highs. The CBOE Volatility “fear” index, a measure of the premium traders are willing to pay for protection against a drop in the S&P 500, jumped more than 30 percent to a nearly five-month high. “The Greek government’s willingness to walk into the fire is a dangerous proposition for Europe and the global markets,” Kathy Lien, managing director of FX strategy for BK Asset Management in New York, said in a note to clients.

Although non-payment may not constitute a formal default, being in “arrears” could trigger a block on any further assistance from the multilateral lender, according to IMF director Christine Lagarde, Although market fallout from the Greek crisis is expected to last at least until the weekend’s plebiscite, long-term contagion will be contained, according to most experts. U.S. stock futures were up about 0.2 percent in Asia, suggesting that a semblance of stability could return to markets after steep losses in the previous session. Verified email addresses: All users on Independent Media news sites are now required to have a verified email address before being allowed to comment on articles. But those polls were taken before the greferendum was called; now that they are voting on a specific proposal, how many people are actually going to vote yes?

The dollar was flat on the day at 122.50 yen after falling to a one-month low of 122.10 yen on Monday, with market participants citing options-related support at 122. However, here’s the pregame: If Greece votes no, it’s hard to see how it avoids leaving the euro, because if the country reopens its banks without converting the accounts to some currency other than the euro, all the euros in them will start sprouting little wings and flying abroad.

And while we may argue about whether it is better to leave the euro or embrace austerity, trying to operate a modern economy with the banks closed would be indisputably worse than either of those two alternatives. So at this point, we seem to be down to one of two outcomes: Alexis Tsipras wins the referendum, and Greece exits the euro; or Tsipras loses, at which point either he takes the deal or his government falls and is replaced by a less obstreperous crew that takes the deal. Everything from bank accounts to contracts will have to be redenominated, and this will cost people years of savings, as well as disrupting business activities. On his Facebook page this morning, economist William Easterly also cited Dornbusch, who “would have said on Greece, when a fixed exchange rate can’t be sustained, a fixed exchange rate won’t be sustained.” Or as the late Herb Stein once said, “If something can’t go on forever, it will stop.” Greece doesn’t have the wherewithal to share a currency with Germany except at the price of continued misery. But whatever the nation’s moral failures, what we’re witnessing now shows the dangers of trying to cure the problems of weak fiscal discipline with some sort of externally imposed currency regime.

During the ardent height of Ron Paul’s popularity, I tried to explain why this doesn’t work: “You don’t get anything out of a gold standard that you didn’t bring with you. If your government is a credible steward of the money supply, you don’t need it; and if it isn’t, it won’t be able to stay on it long anyway.” This goes double for fiscal discipline. The ability to inflate the currency had gone away, but the currency regime didn’t fix any of the underlying institutional problems that previous governments had solved with inflation.

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