Week End Blog – Greek Limbo, Chinese Lunacy & Nikkei Landmark

Obviously, more Greece in the Week End Blog. As time is running out, talks intensify, but so far without any tangible result. Also, more doubts are being raised about Greece’s willingness to come up with something European finance ministers can work with. Hence, the yield on the 3-year Greek government almost touched 30% this week.

Another telling gauge of how the Greek tragedy is unfolding are the implied default probabilities deferred from credit default swaps. The implied probability of Greece defaulting is now higher than the implied probability of an Ukrainian default. Interestingly, stories about a scenario in which Greece defaults but does NOT leave the Eurozone are suddenly popping up everywhere.

Meanwhile, the, somewhat silent, bank run in Greece is intensifying. Greek banks have lost 99% of their value since 2009, the year that also marks the start of one of the biggest equity market rallies in history.

In China things look far different from Greece, especially from a stock market perspective. The HSBC China Manufacturing PMI fell again (now at 49.2), but investors really couldn’t care less. Stocks are up a whopping 118% YoY.

Trying to explain China’s mega rally with economic data is therefore useless. Other powers are at work here. Just take a look at the number of new stock market accounts. ‘Frenzy’ comes to mind!

The meteoric rise of Chinese stocks is not matched by a comparable rise in earnings, however. As as result valuations have shot up. Chinese stocks are now more expensive than both emerging and developed markets.

Asia brought more joy for equity investors. After a period of 15 years the Nikkei index (re)crossed the 20K threshold for the first time. Perhaps Japanese style QE has failed to structurally prop up inflation, it does a fine job in pushing up equity prices.

Talking about QE, look at that balance sheet of the ECB. It has finally come to live as the ECB started its bond buying program.

The ECB’s massive appetite for Eurozone government has already pulled down interest rates to levels which are hard to comprehend. But this week markets showed it’s not always a one way bet. In less than two days the yield on the German 10-year bund doubled. Perhaps less impressive if we take into account that the yield was just 0.07% at the time, but still the move makes clear that interest rates can still go up.

Something else! Who is willing to explain the gap in this graph? For decades stocks have moved parallel to the ratio of gold to silver. But this is no longer the case. I was a bit puzzled by the logic behind this relationship anyway, but the divergence in recent years makes me wonder. Is this also QE?

Time to round off this Week End Blog. with lazy Dutch and Germans! OECD numbers show that the Dutch and Germans work the least hours per year. The Greek make 50% more hours on the job! Yes, of course, what matters is what you actually do in those hours, but ‘hey’ give the Greek a break!

Enjoy your weekend!

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