Global Daily – Greek crash

by: Nick Kounis , Maritza Cabezas

  • Greek equity market slumps on return, as economy nose-dives and Grexit risks remain
  • China PMI adds to pressure on commodity markets, though other data more encouraging
  • Fed still looks set to kick-off a slow rate hike cycle in September




Greek equity market posts spectacular drop on re-open

The Greek equity market re-opened on Monday follow a five-week enforced break following the crisis that has engulfed the country. The ASE index fell as much as 23%, with several banking stocks hitting the -30% maximum threshold allowed by the exchange. The equity market regained some traction later, but was still down 16%.


Slump reflects Grexit risks and deepening recession

The Greek crisis deepened during the period the market was closed. Although an agreement with creditors has followed, the market reaction reflects that Grexit risks remain elevated. There are still a lot of hurdles to overcome before Greece is on a viable long-term programme that can eventually be expected to lead to recovery. In the meantime, the economy has fallen off a cliff. The manufacturing PMI fell to an all-time low in July and is consistent with a deep recession (see chart). We expect the Greek economy to contract on average by 3% this year and 5% in 2016.


China PMI fuels commodity worries

On a more global level, investor worries continue to surround  China’s economic outlook and the related impact on commodity markets. Indeed, commodity prices saw broad-based declines on Monday, partly reflecting the confirmation that China’s manufacturing PMI was weak on Monday. Although China risks have increased over the last few months, other high frequency data have shown signs of stabilising momentum recently. Nevertheless, a number of commodities are also being undermined by over-supply, not least oil, while precious metals are being hurt by the prospect of Fed hikes.


Global manufacturing growing moderately

More broadly, the global manufacturing PMI was stable at 51 in July, leaving the index on a sideways trend consistent with moderate growth. Although China’s index fell, it was broadly stable in the eurozone (down 0.1 pp to 52.4) and US (steady at 53.8) and it rose in the UK and India. Global manufacturing is currently growing moderately, but we expect it to gain some pace as domestic demand in advanced economies firms and stimulus help China’s economy to regain traction.


Fed likely to raise target in September…

Meanwhile, we maintain our current call that the Federal Reserve will start a slow rate hike cycle in September, despite the mixed data released in the past days. Although US economic growth is lower than in previous cycles, it is growing at above-trend rates, suggesting that slack is diminishing. Indeed the global financial crisis claimed its toll with a loss in output and slower potential growth in the US. Average trend growth was around 3.1%, but potential growth is now around 2%. Strong job growth and falling unemployment are in line with this picture.


…despite weak wage growth

Wage growth remains subdued, but it should not be a barrier for the Fed to raise rates. The employment cost index increased by only 0.2% sa in the second quarter, the softest gain since 1982. On a year on year basis, the ECI increased 2% in the second quarter. However, Chair Yellen has repeatedly stressed this is not a necessary condition. She recently noted that “we have not seen wage growth pick up… we may not see wage growth pick up, I wouldn’t say either that is a precondition to raising rates…” Nevertheless, the next two job reports and other incoming data will be crucial for the September rate decision.