In yesterday’s Greek referendum on whether to accept the bailout deal presented by the Eurozone there was a divisive no vote. In a turnout of just over 62.5%, 61.31% voted no and 39.69% voted yes. The Greek Finance Minister Yanis Varoufakis said this morning that with the scale of the no vote Greece will call on its creditors to find some common ground adding the no vote is a big yes to a democratic Europe, then promptly resigned!! The self-proclaimed "erratic Marxist" said in a statement "I was made aware of a certain ‘preference’ by some Eurogroup participants, and assorted ‘partners’, for my... ‘Absence’ from its meetings; an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement". However German economy Minister Sigmar Gabriel later said it was hard to imagine talks on a new bailout programme with Greece.
This morning German Chancellor Angela Merkel travelled to Paris to discuss the referendum result with her French counterpart Francois Hollande with the heads of the European Commission, Donald Tusk, the ECB’s Mario Draghi and Eurogroup chairman Jeroen Dijsselbloem holding a conference call. There will also be an emergency Eurozone heads of states meeting tomorrow. After the morning meeting a spokesman for Merkel said “With regard to yesterday's decision by Greek citizens the preconditions for entering into negotiations over a new aid programme do not currently exist” however the door for talks was “always open”. He went on to say “Greece is a member of the Euro. It is up to Greece and its government to act so that this can remain the case”
On the back of the Greek vote currency markets were initially subdued. The euro did initially dip against the dollar to 1.0969 before rallying back to 1.1026. UK, French and German government bonds yields fell between 2.5 and 4.5 basis points (bps) whilst southern EU countries (Spain, Portugal and Italy) yields rose between 9.5 and 19 bps. Greek government two-year bond yields rose over 1450 bps to yield 48.26% with the ten-year yield rising 325 bps to 17.27%. European equity markets are down anywhere between 1 and 3%.
The next 48 hours will be a critical period for both Greece and the EU and could well shape both for many years to come.
With the situation in Greece still weighing heavy on investor sentiment, eyes turned to China who announced over the weekend that they would be taking steps to prop up the country’s equity market; which has been one of the best performing indices this year but has recently seen around USD 3tn in market value wiped out.
It all began when the market started to “overheat”, the Shanghai Composite Index (or A-Share Index) had gained over 150% in the 12 months to the peak on June 12, or a gain of roughly USD 6.5tn. The China Securities Regulatory Commission (CSRC) took steps to cool the market by cracking down on over-the-counter margin usage; which some reports suggest reached as much as 9.5% of the A-share’s market free-float. This then led to the aggressive unwinding of margin trading which quickly saw the market sell-off. Policymakers have since introduced a number of easing measures; the more recent interest rate and trading fee cuts have so far been unsuccessful in stemming the country’s recent equity market landslide.
Clearly further measures were required as the A-Shares index was down around 29% from the highs in June to Friday's close. So over the weekend Beijing announced a number of key measures to help support the equity market, these include: the collective pledge between China’s top 21 brokerages and asset managers to invest roughly RMB 120bn into a stock market stabilisation fund. In addition, the Shanghai and Shenzhen stock exchanges suspended 28 - already approved - initial share offerings or IPOs as a measure to ease any potential liquidity shock. Lastly, on Sunday the CSRC approved the broadening of liquidity support for China Securities Finance Corporation (CSF) via the People’s Bank of China (PBoC); the amount of registered capital will be boosted from RMB 20bn to RMB 100bn in order to “enhance its capacity to safeguard market stability.”
The market is showing signs of stabilising having dipped slightly this morning, year to date the Shanghai Composite Index is still up over 16% (at time of writing). There are obvious concerns surrounding the global ramifications of a China equity crash, but it is very clear that Chinese authorities will continue to support the market and will likely deploy further measures if necessary.