Week End Blog – Greece, Oil, Ruble, …Stress!

It’s always when you least expect it. A phrase that applies perfectly to the sudden crisis in Greece. In a surprise move the government of Greece announced it will bring forward the process of electing a new president. This move is accompanied with serious risk, as markets clearly demonstrated. In the case that no president is elected Prime Minister Samaras is obligated to call for a parliamentary election. This election could well be won by the anti-bailout party Syriza. Syriza wants to write down Greek debt, and as became painfully clear this week, the markets still has many concerns on how this would turn out. The graph below shows the total collapse of the Greek stock market and the massive spike in the yield on Greek government bonds.

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Interestingly, for next year, Greece only has to pay back debt that it received from its helpers, the ECB and IMF. Their intentions are pretty obvious. No write downs are to be accepted at this point in time.

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Now, I am no expert on Greek politics, but it seems pretty obvious that there will be no new President before Christmas. There are many views floating around, but perhaps these betting odds are most telling. You can make a lot of money by betting on the Greek Parliament electing a president, and not all that much money by betting on the Parliament not electing a president.

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The result of all the unrest that has appeared in Greece is best reflected in one statistic, volatility. Volatility spiked as stock markets tumbled. If you were hoping for a nice and quiet December, forget it, the last round of the Greek presidential election is on the 29th.

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And then there is oil. Oil prices continued its increasingly impressive slide, as the International Energy Agency cut its oil demand forecast for the 4th time in only five months. I don’t know if we can continue to say that these are actual forecasts, or perhaps just guesses. Crude oil is now trading well below the barrier of USD 60. We have to go back to early 2009 to find lower prices.

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From an historical perspective the fall in oil prices is also pretty impressive. This is now the second worst year for WTI crude in the last 30 years.

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But, as mentioned in previous Week End Blogs there are both winners and losers of lower oil prices. This graph circulated on Twitter this week, showing a world map with the GDP impact of slowing oil prices. I guess Venezuela was never the place to be, but currently things should look particular grim, I guess.

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In Russia, the situation is probably as bad, if not worse. The country has been in the same awkward position for quite some time now. Crashing oil prices lead to lower GDP growth expectations, a fast depreciating ruble and higher inflation. CDS spreads are now pricing a significant Russian default rate.

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The recent major correction in the Russian ruble is shown best when plotted against some other ugly currencies. Ukraine’s hryvnia is still leading the race to the bottom, but the ruble is really trying hard to take over that position as we near the end of the year. These Russians, even when it comes to an innocent currency race, they just can’t let the Ukraine go.

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But not all things are heading south. China’s stock market is surging. Since the end of June, the Shanghai Stock Exchange has risen by more than 40%. Incoming capital from abroad, the government increasing liquidity, a deteriorating housing sector, they probably all contributed to the meteoric rise of Chinese stocks. But none of them have anything to do with fundamentals, though. When plotted against the PMI, the stock market performance does not immediately rhyme with fundamentals.

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Charting Chinese stock returns against money supply growth gives the same worrying result. It’s pretty difficult to explain China’s rally with fundamentals.

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In fact China’s economy is moving in the wrong direction all together. Instead of becoming a more consumer-led economy, investments are percentage of GDP have steadily risen over time.

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This week the ECB treated banks with another round of LTRO, Targeted LTRO to be precise. Banks could pick up free money again, but just as with the TLTRO 1, they were not all that eager to sign up. In comparison with the first two LTROs a couple of years ago, the amount of money borrowed by banks is hardly worth the hassle. Banks just don’t want more cheap money!

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I will end this Week End Blog with some positive news. Historical stock market data show that the real end-of-year rally starts in the second half of December, and not the first.

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Isn’t that great.

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Thanks for reading. Enjoy your weekend!

One response to “Week End Blog – Greece, Oil, Ruble, …Stress!

  1. Pingback: Beleggingslinks week 51 – Gaan robots ons werk overnemen? | A3 Beleggen·

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