Besides the usual worries about Greece, we now have also the markets in China to cause serious headaches.
Today, the Shanghai Shenzhen CSI 300 Index plunged 6.75 percent while the Shanghai Stock Exchange Composite Index was down 5.91 percent. Both indexes are down more than 30 percent since mid-June (equivalent to a drop in the DJIA of more than 5,300 points), which shows both markets are in panic-selling mode.
In the meantime and in trying to stem the rout, about 1,300 shares of Chinese firms have been “suspended” on the China exchanges, which is an historical first. Investors now fear the list of suspended shares could be expanded further, which makes it impossible to sell any of all the concerned shares.
The PBoC (China’s Central Bank) has also informed it would “uphold market stability” by providing liquidity to the China Securities Finance Corporation (CSF), which makes margin financing available to brokers, which brings us to an alarming situation by which China’s Central Bank’s (PBoC) funds, through a back-door of course, are now being used to purchase stocks. This is market manipulation the Chinese way.
BofA Merrill Lynch has already warned for the risk of a financial crisis. As an investor I wouldn't take that warning lightly.
Maybe surprising to many, but it’s interesting to see how the patterns of China’s recent markets tumbles seem, in some way, similar to what happened in the U.S. during the crash in 1929.
History teaches us, when on October 24, 1929, at a top bankers meeting at the House of Morgan in NY they announced their plan to pool resources to put a floor under share prices after the panic selling on “Black Monday,” it worked only for a few days, and then the market dropped another 34 percent over the next three weeks.
I’m not saying the Chinese support measures await a similar destiny to what happened on Wall Street in 1929, but it can’t be excluded either. As Mark Twain said: “History doesn't repeat itself but it often rhymes.”
In this context, on Saturday, 21 Chinese brokerage firms pledged $19.3 billion to a large-cap stock fund, which was hoped for it would be able to stabilize share prices after the biggest 3-week tumble in the Shanghai Composite Index since 1992, but their effort remained in vain.
It’s also noteworthy, and this a sign of panic, no doubt about that, the China State-owned Assets Supervision and Administration Commission of the State Council (SASAC) also has informed central-government-owned firms should not sell shares of their own listed companies, but instead should buy more stock in companies they control to stabilize prices. Besides that, the China Insurance Regulatory Commission (CIRC) also has informed “qualified” insurers could increase their ratio of equity assets to 40 percent from 30 percent that was permitted till now.
All these events are certainly important enough for investors to keep an eye on how all that plays out. Keep in mind, contagion can spread “beyond borders” extremely quickly.
For now, contagion from China seems relatively limited to Hong Kong, which today tumbled at some point as much as 8.09 percent, which was its biggest drop ever, before closing down 5.84 percent and which index is now down about 19 percent since the end of May.
Unfortunately, looking at a broader picture and taking the price of copper into account, which is a trustworthy indicator of the situation of the global economy, its precipitous drop coupled with a developing China market crash we also see the Bloomberg commodity index at about its lowest levels since 2002. No, all this doesn’t bode well for things to come, and this as well as for developed- as well as developing economies!
Besides all that, the Greece-EU-IMF crisis continues unabated. Because it's about the only thing that's more or less for sure, here’s the time table till Sunday:
- The Eurogroup will hold a conference call today to weigh Greece's new aid request and call for an evaluation by the commission.
- By Friday, Greece must have detailed the reforms it is prepared to make.
- Assessment of Greece's proposals will feed into a series of meetings over the weekend that will culminate in summits of both euro-zone leaders and the broader 28-nation EU on Sunday.
On Tuesday, EU Council President Donald Tusk said: “… Our inability to find agreement may lead to the bankruptcy of Greece and the insolvency of its banking system … I have no doubt that this will affect all Europe also in the geopolitical sense. If someone has any illusion that it will not be so, they are naïve … Until now, I have avoided talking about deadlines. But tonight I have to say loud and clear that the final deadline ends this week…”
Greek Prime Minister Alexis Tsipras today told the European Parliament Greece will present a detailed proposal to the EU in the next two to three days, which brings them really uncomfortably close to Sunday.
Over the near future, uncertainty, and therefore volatility will set the rules of the game.
I personally prefer staying away from games under these rules.
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