No Bulls Left in the China Shop

No Bulls Left in the China Shop.
by Brenda Kelly

It’s almost a relief to start a piece without it centering around Greece (in the first paragraph anyway). European equity markets are tracking overnight losses in Asia after China markets plunged amid a mix of concerns over margin trading, tight liquidity and bearish sentiment. There are few bulls, if any, left in the China shop and the UK basic resource sector is under fire as a result. In fact no sector is in the green in early trade.
Nevertheless, the usual 2012-style mutterings of a RRR cut from the PBOC on the back of these dramatic falls will likely protect from more downside in the near term but we can expect to see choppiness until that is in place.

A deal is still possible with Greece apparently. From the outside looking in, we seem to be no closer to a deal than we were a month ago . The new deadline for credible proposals is this Saturday now but given that we are reduced to semantics on whether a failure to repay the IMF is considered a default or a simply a question of being in arrears, it appears that the overall expectation is that the IMF will not be getting its money. A downbeat Varoufakis has postured that the Greek government has accepted a huge amount of austerity but that the troika are giving little if no room for policy making.

Despite the assurances from many corners, that Greece is not systemic, any sense of complacency felt in financial markets earlier this week is becoming less pronounced as investors and traders appear not altogether willing to hold a position over the weekend.
This is evident in the equity space in particular. Price action in the FTSE had been relatively sanguine relative to other European indices but today has shed over 1% with only the supermarkets looking healthy.

BOE’s Mark Carney is due to participate in a panel discussion at the 2015 Conference on Inclusive Capitalism, in London later this afternoon. No doubt he will have to field questions around future monetary tightening. The pound remains stuck in a tight range against both the dollar and euro. The greenback will likely see additional upside should Carney demure from any commitment to rate hikes.

Tesco (+3.5%) It’s testament to current market conditions that merely reporting a slower rate of decline in sales can be so well received by investors. Better than expected results from Tesco this morning sees the shares up 3.5% and adding 2 points to the FTSE in early trade. A -1.3% like-for-like sales 'improvement' vs Q1 2014 and also exceeding the -2%-3% analyst consensus. The outlook remains cautious but the cost cutting appears to be working. Tesco’s strategy is to be ‘volume driven’ as a result. There has also been some chatter regarding Tesco being a potential takeover target which has yet to be borne out. Morrisons (1.15%) and Sainsbury (+1.71%) are also in demand this morning once again.

Arm Holdings (-3.4%) Profit taking following yesterday’s nice move higher in concert with Apple is pulling the shares back towards the 1110p level this morning. The possibility that Apple will become less dependent on Arm Holdings for its chips owing to its new ‘Bitcode’ feature has seen the brokers take a red pen to the company is really putting the boot in to shares this morning.

GlaxoSmithKline (+0.26): A degree of safe haven capital flow and a broker upgrade from HSBC is helping to elevate the stock price this morning. The shares had shed a fairly heft 18% since the highs seen in April. A question of falling too far too fast. HSBC have a fairly optimistic 1700p target for the company shares.

The UOM Consumer sentiment data is due to be released later this afternoon. It’s expected to remain at 94.6 but given the lack of upside in US indices recently, the market may be set for a disappointing print here.

We are calling the Dow up 23 points.

Fire-ball back in Greek hands
by Ipek Ozkardeskaya

Greece and the EU keep passing less of a ball, more of a hot potato as June 30th payment deadline approaches. The weekend is decisive says German Chancellor Merkel.

After the Eurogroup announced to ‘indefinitely suspend’ negotiations on Thursday, DAX lost 100 points in a single move, without however damaging any key technical levels. The 200H MA remains a solid support before the week’s closing bell. Thick layer of offers at 11600/800 stands ready to fight the upside attempts. Pre-weekend, traders will certainly refrain from building fresh long/short position to stay away from Greece-related risks. Potential position unwinding before the weekend should keep the direction unclear and the volatilities two-sided.

Moving further, DAX’s light exposure to Greece should not be a heavy barrier before a recovery back at 12000/12500 marker.

Euro remains on standby. The EURUSD pivot is set at Fibonacci’ 50% on June recovery (1.1162) to distinguish a fresh attempt to 1.1436/1.1500 from a fall back to a distant 1.1040/60 (Fib 23.6% projection from Apr-May projection on June rise / technical monitor). Option offers trail below 1.1190/1.1200 before the weekly closing bell.

Against the pound, 0.7070/0.70p is where the next battle between bears and bulls should take place.

ECB balance sheet stretches

The ECB’s balance sheet expanded to 2,451 trillion euro, up from 1,988 trillion euro on September 2014. The ECB bought 92.113 billion euro worth of covered bonds and 8.292 billion euro worth of ABS since it launched the private debt purchases program in October/November last year. Draghi’s team also adds 60 billion euros worth of sovereign debt in its portfolio each month since March. If the idea is to bring the ECB’s balance sheet back to 3 trillion euros, we are still left with a long way to go.

The liquidity injection in the EU, combined to hawkish shift in Fed expectations could only weigh on euro against the dollar on months ahead. A potential Greek accident could however reshuffle the euro’s fundamental value. A euro-dollar may then be well off parity.