Despite a pop higher yesterday afternoon on what transpired to be a false positive from the Greek talks, European equity indices are now back on the defensive this morning. To say that the G7 meetings are progressing may be an understatement given that the focus remains heavily on Greece so we may well see a choppy newswire driven market again today. Already we’ve had a statement from the ECB that the risk of default has increased sharply especially in light of the substantial deposit outflows.
The basic materials sector is dragging the FTSE down in early trade on news that Australian capital expenditure and business investment plans are at recessionary levels. Expectations are that capital expenditure down under has fallen by 4.4% in Q1.
The pound found a bid ahead of the UK GDP second estimate which was unrevised at 0.3% qoq. The pound has found a base around the $1.5314 level for now.
The UK benchmark is holding above the 7000 level but shares in Anglo American (LONDON:AAL) and Glencore (LONDON:GLEN) are on the back foot in early trade losing 2.45% and 1.45% respectively.
The FIFA bribery allegations are also making their mark. Reports that bribes were paid via accounts held with major global banks has once again raised the scandal spectre for the financial sector. HSBC (NYSE:HSBC)is down 1.3% and we could expect to see similar downside the US financial space later this afternoon. The banks allegedly involved include JPMorgan (NYSE:JPM), Citigroup (NYSE:C), UBS (NYSE:UBS) and Julius Baer (SIX:BAER).
With US unemployment claims at a 15 year low, traders will want to see the status quo maintained. A slight decrease from last week’s 274,000 jobless claims is expected today. Any print below the 270,000 mark could underpin the recent dollar strength and prolong the recent sideways to downside bias witnessed in US equities lately.
We are calling the Dow down 41 points lower at 18121.
Shanghai’s sell-off warns of a stock bubble
Who still dares to deny that the rally in the stock markets is exclusively due to the excess liquidity in the system? There is no secret: the economic conjuncture and the companies’ performance in China and elsewhere have little to do with the stock prices we see currently on our screens. The excessive amount of liquidity in the market, low interest rates push retail investors into the stock markets which, besides swelling the equity prices, create a risky base for the real investors. Shanghai’s sell-off has been an excellent proof of the ridiculousness of hoping growth by injecting floating cash in the economy.
All this to say, if Shanghai Composite drops 6.50% on tighter lending conditions and lower cash in the system, the high-leverage nature of the market will inevitable push more retail investors to close their positions to avoid margin calls on lack of collateral and decrease availability of cash for companies.
China has little choice but to liberalise the market and to allow the international capital to flow in, if the goal is to recover toward the two digit growth figures.