Greek Crisis. Monday Evening Scotch. 29 June, 2015.
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Yes - tonight is worthy of a stiff scotch (single malt, no ice, thanks) rather than a liqueur.
The financial media is in a frenzy over the Greek situation, and the Australian market reacted accordingly, XJO down -2.23%.
Baron Rothschild, a famous British 18th Century nobleman and member of the Rothschild banking family, supposedly said:
The time to buy is when there is blood in the street.
Well - there's no blood in the streets of Athens (yet) but there's plenty of red ink in financial markets. Is it time to buy?
Let's first have a look the charts of the XJO.
XJO Weekly:
The last three times the XJO has got down to the 100-Week MA the Index has bounced and headed higher - at least for a couple of weeks or so. Now - we're only one day into the week, so this could just as easily break lower and prove that recent episodes are no guide. But at this stage, let's consider that the previous three efforts as possible precedents.
XJO Daily:
It looks ominous with a break of a significant support level. Indicators are showing positive divergences suggesting that a move to the upside is not far away.
How's the German stock market faring tonight? It opened well down, then recovered some of the losses. A five minute chart from bigcharts.com shows it is consolidating. Indicators suggest that the current rebound could have long legs. But the chart needs to rise above resistance. I think we'll see more upside tonight.
What's happened in previous crises?
The nearest historical crisis I can come up with is Crete from March 2013. Then the Europeans were weak for a few weeks but America barely moved. Australia was more like the Europeans - we were weak for three weeks. Back then, the Europeans (and us) came off a high. This time is different - the Europeans have had a big fall since mid-April with a recovery last week. That suggests that much of the risk from the Greek crisis was already priced into the market. Hope of a resolution last week resulted in a rebound. So this time we're probably looking at a test of the recent low. A bounce of that would be bullish.
(Looking at past analogues is fraught with peril as many other factors could have been occurring at that time.)
Here's what the RBA said at the opening of its overview in its Semi-annual Financial Stability Review in March, 2013:
Global financial conditions have improved significantly since the previous Financial Stability Review, despite the new uncertainty created by the proposed sovereign bailout for Cyprus in the past few weeks. Some earlier European policy initiatives had been seen as demonstrating a strong commitment to deal with the region’s sovereign debt and banking sector problems while maintaining the monetary union, and this boosted confidence over much of the past six months. Confidence was also enhanced by further signs of recovery in some of the major economies, notably the United States, supported by continued monetary stimulus. The improvement in global financial market sentiment has contributed to a rally in risk assets across a range of markets, consistent with increased risk appetite. The improvement in market confidence has helped ease sovereign financing pressures for a number of euro area countries that had been subject to the greatest concerns about debt sustainability. Given the links between sovereign and bank balance sheets, this had positive spillovers to bank funding markets in the region. The euro area nonetheless still faces significant challenges to its stability. Many banks, particularly in the periphery, are still experiencing elevated funding costs, deteriorating asset performance and weak profitability amid subdued economic and property market conditions. This has contributed to tight credit conditions in the region as banks continue to deleverage and reduce their balance sheet risks. Given the unresolved vulnerabilities, it is too early to say whether the improved market sentiment over the past six months is the beginning of a sustained recovery, or merely a temporary upswing. Much will depend on the European authorities’ ability to implement the policy actions needed to restore confidence in debt sustainability and repair banking sectors, while also fostering a recovery in economic activity. In this context, the renewed market tension associated with the handling of the sovereign and banking crisis in Cyprus in recent weeks has provided a reminder of the political, economic and social challenges of resolving the pervasive fiscal and banking sector problems.
That doesn't sound very different from current conditions.
So - what to do?
We may be looking at a few more days of weakness - any upturn is likely to be a buying signal.
If America is weak at the opening tonight, and then recovers substantially (not necessarily positive) I don't think there's much to worry about.
RB
(20min delay)