Europe
It was really just a sense of relief driving markets on Thursday, relief that the implosion of Chinese stock markets has, if not been prevented, at least been put off for another day.
The latest moves including state-backed institutions buying up small cap stocks and mutual funds while also banning insiders and large shareholders from selling their holdings for six months seem to have done the trick.
The sad reality is that after all these interventions, Chinese markets are more government-dependent than ever. Despite the panic that set in over the past five days, there is now an understanding that Chinese authorities will do “whatever it takes” to prop up stock prices. Nobody in China, including investors want to fight the Chinese government.
Increased hopes that a deal will be struck between Greece and its creditors for a new bailout package that will enable Greece to meet its debt payments added to the sense of relief in European markets.
US treasury secretary Jack Lew joined IMF managing director Christine LaGarde in calling for debt relief to be a part of Greece’s next bailout package. Increased outside pressure increases the odds Germany will cave in on debt relief, something they have been vehemently opposed to.
So while investors cheered the German DAX higher on hopes of a deal, stern comments from Bundesbank president Jens Weidmann spoke to a deeper realisation of the situation at hand. Greece has played Germany like a fiddle. The goal of the Syriza party has always been to spend less on paying back creditors and pay more to the disenchanted Greek people that voted them in. Debt restructuring will do just that.
Tactically, it makes sense for Athens to call Germany’s bluff. On Thursday Germany reported a new record high trade surplus for May. Germany has a record trade surplus because the existence of the euro has meant exports from the rest of Europe can’t compete with German productivity by having weaker exchange rates. Merkel, Scheuble and Weidmann all know that if Germany wishes to enjoy all the benefits of the euro like a record trade surplus and record low unemployment, it has to cough up and relieve Greece of some of its debt.
The Bank of England kept rates steady as expected on Thursday with little in the way of market reaction from the British pound or UK equities.
The rebound in China meant UK listed mining stocks were all helping lift the FTSE 100 to higher territory on Thursday. Associated British Foods (LONDON:ABF) was leading the charge after it maintained guidance for the year. House builders rebounded from yesterday’s budget-induced sell-off after Barratt Developments (LONDON:BDEV) reported better than expected rise in profits to see some of the index’s top gains on the day.
US
US stocks saw a strong reaction higher at the open on Thursday, coinciding with a surge in global risk-assets thanks to a bounce back in Chinese equities. The return to normal trading after the nearly four-hour outage yesterday on the NYSE brought with it an element of relief.
Bwin.Party Digital Entertainment (LONDON:BPTY) said rival gambling outfit GVC Hldgs Plc (LONDON:GVC) has offered to buy the company for 110p per share valuing it at £900m
FX
The US Dollar was mixed on Thursday following FOMC minutes on Wednesday that muddied the waters even more over the timing of the first US rate hike.
The Japanese yen gave back some of the safe-haven flows enjoyed on Wednesday with buyers coming in ahead of the psychologically important 120 handle on USD/JPY.
Despite a resurgence in commodities and better than expected Australian unemployment data, AUD/USD barely budge off its six year lows on Thursday, demonstrating distinct weakness that opens the door to more downside in the days to come.
Commodities
Commodities rebounded across the board on Thursday with hopes raised that the rout in Chinese markets has ended before it can do any more material damage to the Chinese economy. Chinese stocks are still up on the year, so if the sell-off ends here, the impact on commodity demand should be limited.
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