Week End Blog – The Usual Suspects & Venezuela

· by · in FINANCIAL MARKETS, MACRO. ·

Same old, same old. Greece was all over the front pages again this week. A deal was forged at the 11th hour and Greece is saved. Well at least on paper. It’s hard to find any people who are even mildly satisfied with this agreement. Tsipras, Schauble, the IMF, they all have their doubts (or worse) if this deal will ‘help’ Greece in reaching debt sustainability. The markets, though, were all pumped up about it. Stocks rose, peripheral spreads fell and the Greek government bond yield more than halved. EUREKA!

One, very essential, aspect concerning the Greek debt issue has not really been touched upon, however. Greece’s debt to GDP level will rise to about 200% (IMF forecast) with this new ‘agreement.’ You need an awful lot of growth, inflation, low interest rates and repayment extensions, to make this debt anywhere near sustainable. Draghi called a Greek debt relief uncontroversial, but also meticulously left out what to do exactly.

That will be all concerning Greece this week. China released credit growth numbers which were again above expectations. GDP growth came in exactly on target, 7.0%. China has fully embraced the model of credit-fueled growth, even though this is not sustainable (there is that word again.) In some way, Greece and China are not that far apart.

Meanwhile, China’s stock market never ceases to amaze.  The Shanghai Composite Index closed flat this week, but volatility remains abundant. Fortunately, the CEO of the Hong Kong Exchange assured us that China’s stock market is the ‘SAFEST’ on earth.

That reminds me, there are two ‘billion-people stock markets’ in the world. And China is neither the safest, nor the most profitable one. India beat China by a fair 600% since 2002!

Oil prices have come down sharply in recent weeks. After a swift rebound from USD 40 to 60, crude oil is heading for USD 50 again. That’s 17% lower than the peak at the end of June.

Rising output is one factor that is driving down oil prices. Despite the major collapse in the second half of last year, oil output has continued to grow. This week Saudi Arabia announced it produced more oil in June than ever before. Add an Iranian nuclear deal and some USD strength and you have found your explanation for lower oil prices.

Falling oil prices has its implications. It pushed Eurozone inflation numbers below zero earlier this year. And, as of today, inflation levels in the Eurozone remain extremely low.

More importantly, inflation expectations have also started to come down again. Perhaps, now that a Greek deal is agreed upon, Draghi has the time to refocus on the inflation issue that is at hand.

In the US, retail sales disappointed. After a couple of months of improving household spending, retail sales fell in June. Perhaps everybody was saving up for Amazon’s Prime Day. Amazon has turned 20, happy birthday!

That should have been ‘OUCH’, by the way. Venezuela will round up this Week End Blog. Its stock market has risen 300% alone this year, pulverizing China’s 20% rally.

Well, at least until you take Venezuela’s inflation rate into account. The country does not publish official inflation data anymore, but estimates suggest that prices are rising with 700% per year, currently. This feels a bit Zimbabwean.

Thank you for reading the Week End Blog. Enjoy your, hopefully Greece-free, weekend.

 

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