Investors are so caught up in tracking the developments or rather the bipolar nature of the leaders in Greece, no one is paying attention to the robust global economic data that is hitting the tape recently. European markets are down 11% since they hit their peak in the middle of April, which ironically coincided with the low in Euro as well. Greece, however, has been the culprit for the ~ 7% move lower over the last two weeks. This past weekend, the Greeks voted with an overwhelming 61% majority to reject the terms of a bailout, risking financial ruin. Are they just playing hardball or does something more ominous lie ahead of us? The market is waiting anxiously to see how the events unfold this week, begging the question, can the Greek Prime Minister devise a plan to keep his country in the Eurozone and stave off economic disaster? The Euro leaders summit this weekend is likely to prove decisive for Greece’s future in the Euro.
Hopes aside, let’s put some numbers to back the lack of contagion risk. Greece is just 2% of Euro area GDP. Previous episodes of the sovereign crisis saw Equities de-rate by 14-20%; however, this was accompanied by significant peripheral spread widening (200-300 bps), which is not expected this time. The uncertainty surrounding the path that Greece will choose to take this week is likely to weigh on stocks in the short-term.
Now let’s take a step back and look at the bigger picture. There are clear signs that the global cycle is starting to turn in a synchronised way. PMI improvements are visible in Europe, the US, and Japan, with even data in China stabilising! New Order to Inventory spread, which tends to be a leading indicator, is also seeing an improvement in both Developed Markets as well as Emerging markets. According to the latest Merril Lynch Global Fund Manager Survey, cash levels have spiked to 4.9%, highest since January’15. The percentage of investors that have taken out “protection” against an Equity market fall over the next three months has also hit a record high. Hmmm…call me skeptical but bull markets don’t usually end with such precaution and nervousness?
Using “Greece” as an explanation seems to be the easiest way to earn a living as a journalist these days . Markets love linking a story to a move, rather than the opposite. The sell off in Oil is really not related to Grexit worries, but to the dire supply side that has been developing recently. At its latest meeting, OPEC decided to keep pumping Oil and leave its strategy unchanged (currently producing above quota of 30 mln bpd). The latest US weekly rig count data showed a pick up of 12 rigs; the first rise seen since the decline in December’14. The price war between OPEC and US shale continues. The physical markets in Oil have been showing a surplus of cargoes for some time.
With WTI prices closer to $60/bbl, US shale producers are in a comfortable position as they have cut costs drastically since Oil collapsed last year. With hedges and funding in place, they can immediately produce from wells put on hold earlier in the year. In addition, an imminent Iran deal could come as early as this week paving the way for exports to hit the market towards end of 2015, or early 2016.
More pain needs to be felt across the board before the Oil market balances itself out. We are not there just yet, it seems.
