Weekly Market Update: Riding the Slow Boat from Athens to Shanghai
The Chinese market meltdown and Greece's bailout brinksmanship drove heightened levels of volatility in global markets this week. In China, the authorities have frozen markets in order to save them. To stem panic selling, trading in over half of A-share stocks were suspended, and investors with stakes exceeding 5% were ordered to maintain their positions. Greece voted 'No' in the referendum last weekend, setting the table for what could be the final round of negotiations between Athens and its creditors. Stocks and bonds around the world see-sawed on headlines out of both crises and the VIX volatility index came very close to 20, its highest level in five months. As the week closed, US treasury bonds posted their biggest two-day selloff in two years as the Greek and Chinese crises showed signs of stabilizing. The dollar saw relatively relaxed trading, with EUR/USD bottoming around 1.0920 on Tuesday before trading up to 1.1220 on yet another round of Hellenic hope. For all the week's gyrations, the NYSE edged up 0.2%, the Nasdaq fell 0.2%, and the S&P ended essentially unchanged.
The Greeks voted no in last weekend's referendum (61.3% to 38.7%), although the issue under consideration was an offer from the creditors that had already been effectively withdrawn. Practically speaking, the referendum strengthened PM Tsipras's hand in negotiations by solidifying his political base at home, clearing the deck to make a new set of proposals and forcing the resignation of controversial Finance Minister Varoufakis. The Greeks were told to submit a new bailout request with robust fiscal reforms, and the Germans vocally ruled out debt haircuts or bridge financing. On Thursday, Greece formally requested what amounts to a third bailout, including €50-60 billion in financing in exchange for a slate of €13-14 billion in tax, pension and other reforms (analysts pointed out that this package was even harsher than the one rejected in the referendum). The creditors demanded a vote on the package in the Greek parliament - which is expected to pass despite the objections of the left wing of Tsipras' party - before it would be considered by the Eurogroup of finance ministers. The Eurogroup will decide over the weekend whether the plan offers debt sustainability and if it should become the basis for yet another round of tough negotiations.
As the week began, the Shanghai Composite had seen a 30% correction since mid-June. Over the weekend, market regulator CSRC said the PBoC would inject liquidity to stabilize the stock market and help keep brokerages afloat, although early gains on the Shanghai composite on Monday evaporated quickly and the slide resumed on Tuesday. On Wednesday, Shanghai opened down 7% and extended those losses beyond 8% in the first few minutes, with over 50% of total listed companies suspending trading on extreme market volatility. The CSRC said it would continue stabilizing blue chip stocks and loosened requirements for insurers to allow for more liquidity. By Thursday, the CSRC was cracking down hard on short sellers and had dictated that holders with 5% or more stakes would have to hold their positions for at least six months, while the PBoC talked up their liquidity support again. The Shanghai composite rallied 12.7% on Thursday and Friday, leaving it up more than 5% for the week.
Volatility in metals markets followed the fall and rise of the Chinese equity markets this week. Mainland traders turned to commodity sales to raise cash and meet margin calls, while others made increasing bearish bets on concerns about slowing economic growth in the world's biggest commodity consumer. Copper, a favored source of collateral financing in China, hit six-year lows on the LME around $5,300/ton midweek, then bounced approximately 5.5% higher through Friday. Iron ore broke through the April lows to trade around $44/ton, a ten-year low, dragging down shares of BHP, Rio Tinto and Fortescue Metals. On Thursday, iron ore bounced 10% higher. Spot gold dropped to four-month lows below $1,160 and has notably failed to bounce higher along with other base and precious metals.
In the US, the JOLTS job openings data saw its second consecutive month of all-time highs, with the May total rising slightly from the April number. The largest increases were seen in retail, professional and business services. Analysts noted that the quit rate declined, with May the lowest level for quits since last November, belaying the narrative of labor market tightening. The minutes from the June 16-17th FOMC meeting out on Wednesday suggested that some committee members believe labor market slack has been eliminated. Jobless claims rose much more than expected last week, surging back toward the 300K level. Analysts said seasonal factors were almost entirely to blame: auto retooling shutdowns usually fall in July, boosting unadjusted claims early in the month and subtracting from them later in the month.
Prospects for a final nuclear deal with Iran receded this week as negotiations continued despite the parties not setting a new official deadline. There were reports that there would be no significant extension of talks and President Obama reportedly told Senate Democrats chances of getting a successful agreement were now less than 50-50. WTI prices declined to three-month lows around $51 midweek as the combination of Greece, China, the Iran talks and another surprise build in the weekly EIA petroleum inventories report. The front-month contract regained ground later in the week, rising to around $53.
The New York Stock Exchange went offline for four hours on Wednesdays, raising fears that a cyberattack had taken out the exchange. Management quickly dispelled these fears, confirming that the outage was due to a faulty software upgrade impacting the exchange's matching engine, which connects buyers and sellers. Software security names CHKP, FEYE and FTNT all saw a modest pop on the event, but the impact on markets was limited: though equity volumes were lower that day, listed stocks continued to trade through other trading venues while the NYSE rebooted its systems.
Microsoft is writing off much of its mobile phone business. Redmond announced this week it would cut 7,800 jobs and write down about $7.6 billion related to Nokia's device business, which it acquired less than two years ago for $7.2 billion. Most of the job cuts will be in phone hardware operations, and the restructuring charge will be $750-$850 million. Microsoft loses money on the business and has about 3% market share in mobile phones.
Healthcare industry consolidation has been a big theme in the M&A market over recent weeks. The five largest for-profit health insurers in the nation - UnitedHealth, Anthem, Aetna, Humana and Cigna - have all been the subject of merger talk. This week, there were reports that Anthem and Cigna were getting closer to a deal, and that UnitedHealth was also interested in Cigna. Last Friday, while US markets were closed, Aetna clinched a deal to acquire Humana for $230/share in cash and stock, in a transaction valued around $34 billion. In the biotech area, Horizon Pharma offered to acquire Depomed for $29.25/share in stock, a 42% premium, in a deal valued around $3.0 billion. Depomed reportedly plans to fight the approach.
