Chinese equities have remained volatile this week, with the Shanghai Composite declining 7.4% today. The reason behind the selloff appears to be retail investors exiting positions they bought on margin. The sales are likely due to nervousness that the Chinese government will take measures to reduce margin loans available to investors. And as the market starts to fall, the most leveraged get margin calls, forcing them to sell to repay the loan, further driving down prices. The Shenzhen Composite and the ChiNext Price Index are now in a bear market, which is defined as a pullback of more than 20% from its highs. Still, the Shanghai Composite is up 30% on the year. In Hong Kong, a more established and more docile market, the swings have been much less pronounced; that market is up about 13% on the year. That’s not to say that it is all doom and gloom in China. Wage growth is around 8% and retail sales are growing at a 10.1% pace. In the past, the government has stepped in to boost the market, and could do so if selloff fears continue to mount.
Congress Approves Fast-Track Bill:
President Obama won Congressional approval for the Fast Track bill, allowing him the negotiating authority for the Trans-Pacific Partnership (TPP), a 12-nation free trade agreement with countries in the Pacific Rim. Two weeks ago, Democrats voted against the bill, but ultimately President Obama was able to rally enough of them on his side to push it through. This is just the first step in this process, however. Both Japan and New Zealand are calling for quick legislation, with Japan hoping to have a pact reached as early as July. Officials in Washington are saying it will likely take much longer than that, hinting that a pact will not be approved prior to the 2016 Presidential campaigns. This will likely lead to trade and foreign policy being important topics during the various campaigns.
Greek Default Looms over Markets:
Financial markets are trying to digest what would happen if the negotiations between Greece and their creditors fail and they are forced to default on their debts.
This debt “crisis” has plagued headlines for close to six years now and there appears to be no clear end in sight. Many analysts believe Greece and their international creditors will make an eleventh hour deal, and most likely continue to “kick the can down the road.” Even when the negotiations looked very bleak over the past few weeks, financial markets have remained relatively calm. Most likely this is due to Greek fatigue, but it also has to do with the facts about the creditors.
As of March, Greece’s outstanding debt stood at 312.7 billion euros ($349.6 billion). Of that, 231.2 billion euros is in the form of loans, with 205 billion euros belonging to institutions, or the public sector (as opposed to the private sector). These institutions include the International Monetary Fund (IMF), the Eurozone’s European Financial Stability Facility and bilateral loans from Eurozone countries. The private sector has very little direct exposure to Greece anymore and Eurozone banks have reduced their exposure as well.
The acceleration of Greece’s debt to GDP ratio has been slowing down since 2014, but is still on an unsustainable trajectory. While their debt continues to spiral out of control they have also experienced a severe recession whereas their GDP has contracted 25 percent from 2009 to 2015 and their public sector employment declined 25 percent. Source: Business Insider
We will continue to monitor the situation in Greece as negotiations persist and another deadline approaches on Monday.
Both New & Existing Home Sales Rise In May:
May New Home Sales numbers were released Tuesday and showed that housing is recovering quicker than expected in the U.S. 546,000 new homes were sold in May, higher than the average economist expectation of 534,000. April’s numbers were also adjusted upward by 27,000, making new home sales 534,000 for that month. Existing home sales were reported Monday and also came in above expectations. 5.35 million existing homes were sold in May, stronger than the 5.25 million that were expected. The lack of inventory in the U.S. (both new and existing) has created a seller’s market, but more importantly, this is likely holding back additional sales. Additionally, mortgage applications rose 1.6% over the most recent week, made up of a 1.2% increase in purchases and 1.8% increase in refinancing. Overall, these factors show the housing market is gaining traction and should continue to recover. New home sales are directly tied to the economy due to the ripple effect that follows, as new homes need to be constructed, then furnished. Below is a chart showing the New Home Sales numbers, with an overlay of the average mortgage interest rate. Though interest rates have begun to rise, a 30-year mortgage is still below 4%, which is low from a historical perspective and still remains accommodative for perspective buyers.
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