Week End Blog – GRESCUE & CHINA MADNESS

· by · in FINANCIAL MARKETS, MACRO. ·

Never, never a dull moment in Europe. As Grexit would be upon us, at least predicted by most economists, investment brokers and other ‘gurus’, Greece handed in yet another bail out proposal. One that was actually on time!

And by the looks of it, Greece seems to have enticed European creditors to consider giving the country a new bail out. That it ‘redefined’ democracy while doing so, seems to be of no major concern for now. The latest reform proposal actually goes a bit further than the original one that was ‘OXI-ed’ in the Greek referendum. I really can’t think of a way to explain this back home. But anyway, the Greek 2-year government bond yield fell by over 20 percentage points on Friday!

Moreover, European creditors seem to like the ‘final’ Greek proposal so much, that the Sunday EU summit could be off. If that were only true. A Greece free weekend! It has been a while.

The prospect of a definite deal between Greece and Europe should also entice the ECB to maintain, or perhaps even increase, ELA to Greek banks. But then again, the ECB was already stretching it.

Any deal holds a downside for the Greek people of course. The economy will continue in recession-mode for some time to come as the government shores up its budget. Pensions will be cut and jobs will be lost. To make things worse: history shows there have been several GDP meltdowns bigger than Greece’s current one.

Interestingly though, there is number of countries that has a bigger government debt per capita level than Greece. And these are not some minor, obscure countries either, as the chart below shows.

Also interesting is that the price of bitcoin popped as markets are pricing in an ultimate debt deal for Greece. That’s in contrast with the notion that bitcoin was positively influenced by the Greek bank holiday. There have been no signs that the Greek people were collectively switching to the digital currency, and the latest price spike confirms this.

Let’s move over to the other ‘problem child’, China. As the first series of measures, to stop mainland share prices from sliding, didn’t work, the Chinese government switched to panic mode. Over half of shares were halted and major shareholders were forbidden (just imagine that) to sell any of their stocks for the next six months.

Meanwhile, volatility spiked to even higher levels. Intraday moves are just massive!

China’s bear market has started to effect other Asian countries as well. Throughout the continued equities got hammered as Chinese measures did not seem to work.

But, if you halt stocks people really want to get rid of, and if you forbid major shareholders to sell, while ordering others to buy, you are destined to reach a tipping point at some point. Hence, this week China A-shares plunged 16% one day, while rising 18% the next. MADNESS!

By the way, did you know? China has more individual stock trading accounts than countries like Indonesia or Japan have individuals.

Compared to Greece and China, The US is an oasis of rest. Steady as she goes. Yes, the Fed mentioned both Greece and China in its statement, but this should not be exaggerated, at least for now. The Atlanta GDPNow model predicts a decent 2.3% growth for Q2, which should make Yellen comfortable enough to raise rates. Especially when the Europeans and Chinese get a little bit less crazy.

Thanks for reading the Week End Blog. And if Greece allows it, enjoy your weekend!

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