Outcome Takes Eurozone Into the Unknown However Greeks had voted Sunday would have heralded a period of turmoil. But with a resounding victory for the “no” vote, Greece and the eurozone are taking a leap into the unknown.
(…) It isn’t clear what the rest of the eurozone will do, but whatever its course, it probably won’t do it rapidly, even though the strength of the referendum’s outcome seemed to come as a shock to European leaders.
German Chancellor Angela Merkel, the central player in crafting a response to the referendum, plans to fly to Paris on Monday to consult with French President François Hollande. Mr. Hollande’s government has been consistently the most sympathetic to Greece in the currency bloc. (…)
Something else is certain: Banks in Greece won’t open Monday, and even if confidence is quickly restored, they are unlikely to open for some weeks. Capital controls preventing the movement of funds out of Greece are likely to be in place even longer. (…)
Fears that currency in Greek bank accounts will be redenominated in drachmas would likely cause a rush to withdraw euros as soon as banks reopen. (…)
The ECB, whose response to the crisis is critical, is unlikely to want to pump more money into Greece without a strong political signal of a commitment that Greece will remain in the eurozone.
As the euro shortage drags on, the government in Athens likely will be unable to pay its external creditors. Ordinary Greeks won’t pay taxes, rent or credit-card bills to keep the euros they have. The government will be forced to pay its internal obligations through scrip—in effect, checks promising a future payment in euros. (…)
From BloombergBriefs:
Even if the situation is more messy and uncertain than before the vote, an exit from the currency union wouldn’t happen overnight. Remember that it has never happened before and there is no established process in European treaties. If new negotiations were to fail, the Greek authorities would have no mandate to take the country out of the currency area. Yesterday’s question wasn’t an “in or out” one. A new vote could give Tsipras a mandate for Grexit, but Greeks would probably use it to say no. According to a Bloomberg poll conducted this week, 81 percent of Greek citizens want to keep the euro.
(…) Her choice is now between yielding to Greek Premier Alexis Tsipras and sweetening the bailout terms for his country, or sticking to her hard line—and her own voters’ sentiment—in refusing any further concession.
Both avenues are fraught with risks: Watering down the Greek bailout could spark a political rebellion at home and dilute the strict rules the eurozone has assembled in the past five years to ward off future crises.
Refusing to bend could see Greece exit from the euro and unleash economic and political chaos in the country. (…)
When parliament convened last week for a debate on Greece, Ms. Merkel’s cautious speech gathered tepid applause from the conservative benches—nothing like the thunderous ovations that greeted Wolfgang Schäuble, the chancellor’s uncompromising finance minister.
Broader public support for a fresh Greek bailout isn’t guaranteed either. While several polls published last week showed Germans were split on whether Greece should exit the euro, up to three-quarters rejected further concessions to Athens. Mr. Schäuble, the embodiment of German intransigence in Greece, received his highest rating ever. (…)
Given all that, principles and an instinct for self-preservation may persuade Ms. Merkel to opt for the second option and stick with her tough line, an outcome many analysts see as more likely. (…)
(…) “With regard to yesterday’s decision by Greek citizens the preconditions for entering into negotiations over a new aid programme do not currently exist,” said Steffen Seibert, spokesman of Ms Merkel, even though the door for talks was “always open”.
Mr Seibert also quashed lingering hopes that Ms Merkel’s visit on Monday to French president François Hollande would result in new rescue proposals. He insisted that Berlin was waiting to see “what proposals the Greek government places on the table”. (…)
Mr Varoufakis quit after Greece’s anti-austerity government scored a decisive victory in a referendum over the terms of its relationship with creditors.
In a blog called “Minister No More!”, the game theorist turned politician said Alexis Tsipras, Greek prime minister, had wanted him to step down to make it easier to deal with creditors, particularly in the eurogroup of finance ministers. (…)
USA
Wage Measures Send Mixed Signals Determining most accurate picture of earnings would help Fed as officials weigh rate move
(…) Average hourly earnings, the best-known measure of workers’ pay, were $24.95 in June, up a scant 2% over the past year, the Labor Department said in the latest employment report released Thursday. That was softer than the 2.3% gain the prior two months but matches the overall pace for the recovery.
At first glance, that suggests the labor market isn’t tight enough to generate big pay gains despite a drop in unemployment to a seven-year low.
But economists generally prefer a different measure of wages known as the employment cost index, or ECI. Unlike average hourly earnings, the ECI controls for compositional shifts in the labor force, allowing fairly clean historical comparisons. Average hourly earnings can rise simply because more high-paid workers were hired, not because pay raises picked up.
In the most recent data available, the employment cost index showed labor costs rose 2.6% in the first quarter, accelerating from 2.2% growth in the third and fourth quarters. Because the ECI adjusts for changes in the workforce, the more robust figure could suggest broad-based wage gains for workers.
Yet a third measure of wages is called employer costs for employee compensation, or ECEC. The ECEC and ECI are based on the same survey, and both measure wages and benefits. But unlike the ECI, the ECEC doesn’t adjust for the labor-force composition. So a surge in a high-paid category can skew it. Thus, ECEC captures labor costs at a particular moment but isn’t meant to be used to compare different time periods.
This measure is sending by far the most upbeat message: Employer costs for employee compensation jumped 4.9% from a year earlier in the first quarter, the second consecutive increase at that relatively robust level. ECEC may be growing faster than ECI because of compositional shifts in the workforce, suggesting high-earning workers are doing particularly well. (…)
So which is telling the real story?
Omair Sharif, a strategist at SG Americas Securities, said the true picture is probably somewhere between the lackluster 2% reading from hourly earnings and the more robust 2.6% for the ECI. The hourly measure may have been distorted by a statistical quirk related to when the Labor Department measured earnings, and the ECI appears to have been inflated by bonus payments. (…)
The Atlanta Fed, however, suggests the economy may already be there. It draws from Census Bureau data to look at workers who haven’t changed jobs to produce its wage-growth tracker, which now says median wages were up 3.3% in May from a year earlier, the strongest showing in six years. (…)
The Federal Reserve’s Labor Market Condition Index’s rate of change turned positive again in May, as the monthly jobs report showed a substantial acceleration relative to April. In light of the June jobs report, the LMCI is likely to continue improving, though moderately. Twelve of the 19 indicators summarized in the LMCI are released with the monthly employment report. Policy makers have said for months that they need to see further improvement in the labor market as well as stable inflation before raising rates. The LMCI will probably show that progress was forthcoming in June, keeping a September hike on the table.
Why Participation in the U.S. Workforce Has Plunged to Its Lowest Since 1977 June’s typically a month when millions of people enter the labor force
(…) In the last decade, an average 1.35 million workers have entered the labor force every June on a not seasonally adjusted basis. This year, the gain was 564,000. That translates into a decline for the seasonally adjusted data, since the monthly increase was much less than it usually is.
There could be a couple explanations for this. The BLS gets its labor force data from Current Population Survey, in which households say whether they were employed, unemployed and looking for work, or neither during the Sunday-to-Sunday period that includes the 12th day of the month.
Last month, this reference period occurred earlier than normal, and as a result a smaller share of the labor force gains were captured, according to Betsey Stevenson, a member of the President Barack Obama’s Council of Economic Advisers. This discrepancy could account for 500,000 people missing from the labor force, she wrote in a blog post.
Economists are also considering whether this year’s severe winter weather is to blame for yet another disappointing data point. A high number of snow days could have extended the school year in some locations, limiting the normal flow of people into the workforce. (…)
But
Some 402,000 men left the labor force on a seasonally adjusted basis, accounting for 93 percent of the overall decline.
Looking at age groups, the labor force participation rate for workers 45 to 54 years old declined to 79.2 percent, the lowest since December 2013, from 79.6 percent. For 16- to 19-year-olds, it declined to 34.3 percent from 35 percent.
In fact, 60% of the decline in the labor force was in the 25-54 year breadwinner class. So much for the weather effect and the benched students.
So, we just don’t really know…
- More on this: Labor Force Participation: The U.S. and Its Peers
Mohamed El-Erian: US markets not immune from Greek turmoil
(…) US equities and corporate bonds are vulnerable to any notable pick up in overall market risk aversion. That scenario looks likely, at least temporarily, should Greece and its European partners maintain the current path that leads to the country’s disorderly exit from the single currency. (…)
Initially, US asset prices appear vulnerable to heightened volatility, including further selling pressure that would accentuate the losses experienced during June. It does not help that financial assets already trade at elevated levels on the back of central bank interventions that have decoupled prices from underlying fundamentals. (…)
EARNINGS WATCH
Earnings season begins and the FT front page warns:
Wall Street braced for profit declines Drop in quarterly earnings for S&P 500 companies is forecast at 4.5%
(…) The fall ends 10 consecutive quarters of growth and accompanies a 0.23 per cent second quarter fall in equities, the S&P 500’s first quarterly decline since the end of 2012 and a sign that the bull market may have peaked in May.
However, Factset shows that things are actually not getting worse:
Analysts lowered earnings estimates for the S&P 500 for Q2 2015 by a smaller margin relative to recent quarters. On a per-share basis, estimated earnings for the second quarter fell by 2.3% during the quarter. This percentage decline is much smaller than the percentage decline during Q1 (-8.2%), and it is also smaller than the trailing 5-year and 10-year averages. The estimated sales decline for Q2 2015 of -4.5% is also higher than the estimated year-over-year decline of -3.1% at the start of the quarter.
As a result of the downward revisions to earnings estimates, the estimated year-over-year earnings decline of -4.5% today is larger than the expected decline of -2.1% at the start of the second quarter (March 31).
If the Energy sector is excluded, the estimated earnings growth rate for the S&P 500 would jump to 2.2% from -4.5%. If the Energy sector is excluded, the estimated revenue growth rate for the S&P 500 would jump to 1.7% from -4.5%.
Seven sectors have recorded a decline in expected earnings growth since the beginning of the quarter due to downward revisions to earnings estimates, led by the
Industrials sector. The Industrials sector has witnessed the largest decrease in expected earnings growth (to -3.8% from 4.2%) since the start of the quarter. The Consumer Discretionary sector has recorded the second largest drop in expected earnings growth (to 4.6% from 8.9%) since the start of the quarter.At this point in time, 107 companies in the index have issued EPS guidance for Q2 2015. Of these 107 companies, 80 have issued negative EPS guidance and 27 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the second quarter is 75%. This percentage is above the 5-year average of 69%, but is below the percentage recorded at the same point in time in the previous quarter (84%).
In all, companies are giving no indication that things have gotten worse during Q2. The two most sensitive sectors are Consumer Discretionary and Industrials and corporate guidance has not deteriorated in neither sectors compared with Q1.
Furthermore, First Call’s earnings revision index for the S&P 500 Index has turned positive in June for the first time since August 2014. Using the 3-month averages, every sectors is up.
CHINA: CREDIBILITY INCREDIBLY LOST
China to Set Up Fund to Curb Stock Selloff China is establishing a market-stabilization fund aimed at fighting off the biggest stock selloff in years, as concerns grow that the stock-market malaise could be spreading to other parts of the economy.
(…) According to a statement from the Securities Association of China on Saturday afternoon, some 21 Chinese brokerages led by Citic Securities Co. will invest the equivalent of 15% of their net assets as of the end of June, or no less than 120 billion yuan ($19.3 billion) in total, in the fund. But that amount is unlikely to be enough. The plunge in Chinese equities in the past three weeks has wiped out about $2.4 trillion in market value—or about 10 times Greece’s gross domestic product last year.
As a result, the People’s Bank of China is expected to provide financing to the stabilization fund either directly or indirectly through the country’s giant sovereign-wealth fund, the people said. Any such move would require approval by the State Council, the Chinese government’s top decision-making body. (…)
In the statement by the Securities Association, the 21 brokerages also pledged not to reduce any proprietary investments but to try to increase investments in the stock market as long as the Shanghai index stays below 4,500. The index closed down 5.77% on Friday at 3686.92.
The market-stabilization fund will first invest in blue-chip exchange-traded funds to help stabilize the main market, the people said. Its mandate could be widened to include the broader market. (…)
From the July 4 English edition of the People’s Daily:
The brokers will not sell the stocks they held on July 3 and buy more in a proper time so long as the benchmark Shanghai Composite Index is below 4,500 points.
BAML adds:
(…) much of the unauthorized margins were used to buy small cap stocks. So the authority, with or without PBoC’s direct involvement, may have to buy stocks on a very large & very broad scale.
FT Alphaville’s James Mackintosh:
China’s an authoritarian one-party state, so its efforts to bend the market to its will perhaps shouldn’t be a surprise. Western investors shouldn’t feel superior, though: Britain first banned short-selling in Bank of England stock just three years after the Old Lady of Threadneedle Street was set up in 1694, and short selling bans and probes have begun after plenty of the big market crashes since – including the post-Lehman collapse. It never did any good, and regulators and politicians never learnt the lesson: it’s almost never the shorts who cause the problem, but the longs who first drive prices way above reasonable levels, them rush to get out.
PS: Those many policymakers who think short-selling bans must work, since they stop the awful predatory bears betting on price falls, should read this paper from the New York Fed:
The 2008 ban on short sales failed to slow the decline in the price of financial stocks; in fact, prices fell markedly over the two weeks in which the ban was in effect and stabilized once it was lifted. Similarly, following the downgrade of the U.S. sovereign credit rating in 2011—another notable period of market stress—stocks subject to short-selling restrictions performed worse than stocks free of such restraints.
BAML concludes:
SHCOMP is still trading at 17x trailing 12M PER (31x ex. banks), with economic growth stalling and market earnings rapidly decelerating.
FYI:
- Since its peak in mid-June, the Shanghai Composite Index has now fallen by almost -23%.
- The median stock of the top 25th percentile in Shanghai has been flat since the peak of the market on June 12th.
- The median stock among the bottom 25th percentile is down 43%. What goes up, must come down.
Officials Aim Big Booster Shot at Teetering Stock Market
China is readying a massive injection of funds to try to reverse the country’s worst share selloff in years, people familiar with the matter said.
Under the planned move, China’s central bank will indirectly help investors borrow to buy shares in a market that had already seen a rapid buildup in debt from so-called margin financing.
An unprecedented frenzy of measures over the past week culminated in weekend meetings by regulators and officials including Premier Li Keqiang, these people said. The result: a halt to new stock listings and a plan for the central bank to come to the aid of a market that has erased about $2.4 trillion in value during a three-week decline.
On Monday morning, the Shanghai Composite Index opened 7.8% higher at 3975.21. An editorial in the official People’s Daily newspaper, the mouthpiece of China’s Communist Party, said markets would stabilize. “Rainbows always appear after rains,” the editorial said. It said China has the “conditions, ability and confidence in maintaining capital market stability.”
In a statement late Sunday, the top securities regulator said the People’s Bank of China will “provide liquidity assistance” to China Securities Finance Corp., a company owned by the stock regulator. The company will use the money to lend to brokerages, which could then make loans to investors to buy stocks.
This is the first time that funds from the central bank will be directed to institutions other than banks, a dramatic move that indicates leaders’ deep concern over a brewing stock-market crisis.
The exact amount to come from the central bank hasn’t been disclosed. The people with direct knowledge of the plan said no upper limit had been set.
During the weekend, pledges have come in from China’s big state-controlled securities firms, mutual funds and a unit of China’s giant sovereign-wealth fund to buy, buy and buy. (…)
The drastic intervention to rescue the market suggests leaders are concerned not only that the disorderly selling could spread to other parts of the financial system but that it could signal a wider loss of faith in the government’s ability to manage the economy. (…)
At an emergency meeting presided over by Mr. Li on Saturday, officials from China’s central bank and the Finance Ministry cautioned against using huge amounts of government funds to directly purchase beaten-down shares, for fears that would lead to more reckless investment behavior down the road, according to the people with knowledge of the matter.
Getting the central bank to indirectly provide financing to brokerages represents a compromise, they said, as that will make the PBOC the lender of last resort as opposed to a source of bailout funds. (…)
The last dramatic fall in Chinese equities occurred in 2008, when the benchmark Shanghai Composite Index plunged 70% in about a year. At the time, the authorities fiddled with fundraising requirements, nudged financial firms to buy shares and cut interest rates. The government’s seeming inability then to prop up the market caused widespread anger among investors but appeared to result in little economic damage to an economy that never depended much on a stock market. (…)
Z-Ben Advisors, a consultant in Shanghai, estimates that margin debt today is the equivalent of up to 15% of the value of China’s tradable shares.
“This is a very high ratio,” said Ivan Shi, an analyst at Z-Ben. “In 2008, it didn’t exist.”
With many borrowers taking out loans using stocks as collateral, a drop in stock prices would mean banks are owed much more than the collateral is worth, resulting in more losses for the lenders while bad-loan levels already are rising.
Officials at China’s top banking regulator say they are looking into banks’ exposure to the stock market. But at the moment, there is no sign of any big bank or brokerage firm in severe distress as a result of the stock slide. (…)
From Citigroup (via FT Alphaville)
Despite the sentiment help, we believe continued deleverage, and possible reform concerns given recent administrative intervention, will cap index upside. Our calculation suggests only one-fourth margin buys have been forced out so far.
How Chinese Stocks Fell to Earth: ‘My Hairdresser Said It Was a Bull Market’ After Chinese shares hit a seven-year high in June, new investors opened millions of brokerage accounts to play the rally. Many now face big losses despite Beijing’s battle to stem a stock selloff.
(…) Ms. Wang said her holdings are down 32%. “I don’t really follow news on stocks that closely. My hairdresser said it was still a bull market and I needed to get in,” she said. She said she didn’t know what to do when the market started falling and she is still holding her shares.
Others have soured on the market after big losses. Anita Lu, a public relations executive in Shanghai, put most of her savings in Sichuan Goldstone Orient New Material Equipment Co., Ltd., a Chengdu-based pipe maker that trades on China’s small-cap ChiNext market. That was in late May when the stock was at 140 yuan. She sold it last week at 44 yuan. “I will stay away from stocks as long as I can,” she said. (…)
As stocks fell, investors who borrowed money to buy shares began getting margin calls from brokers, or began selling themselves, fearful of incurring huge losses.
The surge of such margin finance had been a key driver behind the rally. Outstanding margin loans reached a record 2.27 trillion yuan as of June 18, before dropping to 1.91 trillion yuan as of Friday July 3. It stood at 1.03 trillion yuan at the start of this year.
Fears of widespread margin calls led to further selling, including a 7.4% fall on June 26. China’s more-volatile small-company market in Shenzhen had fallen 20% from its peak, marking the threshold for a bear market and Shanghai was down by 19% since hitting its high. (…)
“The PBOC’s rush to ease policy like that gave people the impression that even the government was panicking, which would make people panic even more. This is a vicious cycle,” said Mr. Wu, the individual investor.
China’s securities regulator tried to calm investors, saying that day that the number of buyers had “notably increased from Friday.” Investors joked that the number of sellers increased even more. (…)
China’s economy shows ‘positive changes’: statistics bureau China’s economy is showing some positive changes as recent government measures gradually gain traction, but policymakers cannot lower their guard against headwinds crimping growth, the National Bureau of Statistics said on Monday.
Given Beijing’s massive intervention to stem the bear market, official will need to be take even more cautiously in coming months. Here’s a reliable data set:
-
GM China auto sales flat in June despite broad price cuts General Motors Co vehicle sales in China were roughly flat for June as broad price cuts introduced earlier in the year failed to boost demand.
That compares with a 4 percent year-on-year drop in May sales and a 0.4 percent dip in April, when the automaker switched to reporting retail sales rather than wholesale data for China.
GM has largely failed to counteract sluggish auto sales so far despite slashing prices on 40 models in May by up to 20 percent, as China’s economy grows at its slowest rate in 25 years. The automaker also faces rapidly shifting tastes among Chinese consumers, now showing a pronounced preference for small, affordable sport-utility vehicles. (…)
In the first six months of the year, GM sold 1.72 million cars, up 4.4 percent from a year earlier.
For the market overall, sales for January to May rose only 2.1 percent from a year earlier, giving 2015 the slowest start since 2012, according to the most recent statistics available from the China Association of Automobile Manufacturers (CAAM).
And from Markit’s China Services PMI:
The slowdown in services activity growth reflected softer new business gains in June, with service providers signalling the slowest increase in new orders in 11 months. According to panellists, relatively subdued market conditions had dampened overall client demand. Meanwhile, manufacturers saw only a marginal expansion of new work, following a three-month sequence of contraction.
(…) manufacturers cut their payrolls for the twentieth successive month in June, with the latest reduction the sharpest since February 2009.