China And Greece Developments Help World Relax Into Some Financial Momentum

It seems as if for the moment China’s central-planning moves to bolster its main stock exchanges are paying off. Yesterday and today combined, the Shanghai Index was up almost 12%. Beware, though.

Of in the shadows are the countless companies that have had trading in their stocks suspended. Essentially, the have been de-listed indefinitely. Those will have to be brought back on line and traded, and that could cause either another meltdown in Shanghai or prompt another government intervention. (We’re not arguing for or against the intervention, merely pointing out that interventions have varying degrees of impact and longer term efficacies. Quantitative easing in the advanceded economic powers is a case in point.)

Our sense is that the decline in China is not over but any future losses will be more controlled. We see the Shanghai settling in around the mid-3500 to 3800 range once the dust clears.

It seems that the Greek-pan-European agreement on Greece’s debt is headed in the right direction. A $60 billion bailout plan is headed to the Greek parliament. It includes most of the austerity measures Europe has insisted upon and the gross dollar amount of the bailout is slightly higher. 

We shall see next week what happens and how it affects markets. 

Naturally, good news on Greece boosted the recently slumping euro against the U.S. dollar. This should be temporary. U.S. interest rates will rise at some point and Europe’s will remain the same. That would put pressure on the euro. European equities were also up substantially, the DAX and CAC rising 2% and 3% respectively.

As you know, the Fed rate hike is contingent on U.S. data and the data is mixed, indicating the American economy is growing but not at a wonderful pace. We’ll need inflation to really instigate a hike. And that means more and better jobs are needed. However, as anyone who remembers other low-inflation periods, red-hot price rises can come without warning.

Gold seems directionless, which, fundamentally speaking, is correct. Presently there is no call for safe haven investments beyond the solid currencies, namely the dollar, yen and Swiss franc. The euro is not exactly high risk, either, although it is prone to pressure from the greenback’s movements.

Physical demand remained sift this week as many small investors in China chased bargains in equities after last week’s market rout. Buyers in China and in India delayed purchases waiting for gold to dip below 1150, which it very well could.

Silver, however, seems to have escaped the general effects of the risk-on day we’re seeing globally. Our thought is that silver has been largely oversold. That phenomenon, coupled with the deep misgivings about gold, enticed buyers into the market. 

Both West Texas Intermediate and Brent North Sea crude oil are sticking to the lows of their current ranges. As we’ve chanted many times, oversupply, overproduction and sluggish demand are keeping a lid on upward price movement. The closer Iran and other world powers get to a deal, the more likely we will see lower prices. The real tail wagging the oil dog these days is poor demand. That, in turn, reflects the mixed world economic outlook. 

In yesterday’s letter we cited a downward revision by the IMF on the growth forecast for 2015. The report said that instead of 3.5% growth, the world is looking at 3.3% growth. While oil doesn’t react in an apples-to-apples fashion to economic slowdowns, we can safely assume that the 0.2% downtick in growth will affect crude demand about the same amount. Thus, as we can see, pressure on oil is coming from a couple of quarters.

Wishing you as always, good trading,