China May Be More Important Than Greece

The biggest story of the day is the crashing of the Shanghai equities markets. If it continues, this could have enormous repercussions for the world economy.

Yesterday we said that oil dipped significantly because of an unexpectedly higher rig count in the U.S. fields. We have rethought that a bit. The dent in oil is due as much to the China stock bust as it is to higher production.

Gold rose modestly today, a good sign for anyone in on the long trade. The dollar helped blunt any significant upside move, although in later trading the euro recovered against the greenback.

U.S. equities did not trade today because of the Independence Day holiday. Europe was down across the board, Germany, Britain and France, although losses were moderate.

Naturally, all eyes are on the Greek referendum Sunday. Apparently the polling in place pre-voting shows an almost exact 50-50 split on whether Greece should accept the bailout terms or not. However, those same polls show 18% undecided, a large number heading into any vote.

Depending on the outcome, this coming week could see extremely different paths in markets.

If the bailout terms are rejected and Greece goes into full-throttle default, (with what promises to be an attendant exit from the European Monetary Union), look for gold to rise and the euro currency to drop.

If it is a yes vote on acceptance, gold and the euro will reach a sort of stasis before broader market forces and more detailed reactions to the re-structuring of Greece’s economy take over again.

That said, China remains a bigger story. If the flight of capital from Shanghai equities continues it does mean the Chinese economy will take a hit… and, since China is in the big three economies of the world, albeit it much smaller than the U.S. and the EU, the effect could be quite harmful to continued recovery from the Great Recession. Stay tuned

Wishing you as always, good trading,