Macro Horizons: Greece Drags On, Chinese Shares Keep Falling

        By Alen Mattich
        Macro Horizons covers the main macroeconomic and policy news events affecting foreign-exchange, fixed income and equity markets around the world, as selected by editors in New York, London and Hong Kong.
        WRAP: Chinese shares are still falling and the Greek crisis continues to rumble. So far Greece has captured the bigger headlines. But European equity and sovereign bond market resilience suggest that Greece's problems are likely to remain contained. China, though, is a more substantial concern for global investors. The immediate focus is on Chinese officials' seeming inability to halt the relentless slide in domestic share prices. More worrying perhaps is the slide in iron ore and copper prices, which don't bode well for what's going on in the Chinese economy more generally. The impact has already spread to Australia, whose currency is hitting six-year lows against the dollar, limiting the Australian central bank's policy options. (AM)
        GREECE:
        --European Commission President Jean-Claude Junker warned against expecting a quick resolution to negotiations between Greece and its creditors.
        --Greek banks face running out of money in the coming days after the European Central Bank raised the amount of collateral needed for emergency liquidity.
        --The European Central Bank will cut off liquidity to Greece should it miss its July 20 deadline to repay loans made by the central bank, warned ECB governing council member Ewald Nowotny.
        -- Germany will not agree to a Greek debt restructuring, according to a German finance ministry spokesman.
        The clock is ticking for Greek Prime Minister Alexis Tsipras. He may have the backing of a substantial majority of Greeks - based on last weekend's referendum - but his negotiating position is weak. He continues to call for a restructuring of Greek debt, which the German government won't consider. And some of his budget proposals still fall short of what the country's creditors want. On the other hand, he has a new and presumably less combative finance minister leading negotiations. Meanwhile, the ECB has drawn the line on emergency liquidity assistance. Greek banks are likely to run out of funds over the coming days, notwithstanding ATM withdrawal limits and a continuing bank holiday. And then Greece has to deal with a EUR3.5 billion payment owed to the ECB on July 20. It is already in arrears on a EUR1.55 billion payment to the International Monetary Fund. Little wonder that economists continue to ratchet up their probabilities of a Greek exit from the euro. (AM)
        CHINA: Chinese shares fell again in overnight trade, notwithstanding the weekend's efforts by Chinese authorities to prop up prices.
        The Chinese government is clearly worried by what's happening in the Chinese stock market. But so far official support has been relatively modest - certainly compared with the all-out infusions of fiscal and central bank stimulus following Lehman Brothers bankruptcy. The government is already having to deal with a fast slowing economy and - outside of the major cities - an increasingly weak property market. The thread connecting most of China's problems right now seems to be leverage - shares, property and industrial commodities were all bought on margin, often from the shadow banking sector. Falling prices have kicked off a negative spiral that is becoming ever harder to control. (AM)
        AUSTRALIA: Australia's central bank kept it key cash interest rates unchanged at 2.0% following its latest policy meeting, as economists expected.
        With the Australian dollar hitting six-year lows against the U.S. dollar, perhaps it's not surprising Australia's central bank decided to leave its key policy rate unchanged. To what degree the falling currency helps to offset tumbling iron ore prices - Australia is a major exporter - is another matter. In any event, before long, Australia's central bank might be in Brazil's invidious position of having to balance rising inflation against slowing growth. (AM)
        GERMANY: May industrial output was unchanged on the month, as expected, and up 2.1% on the year.
        A pickup in manufacturing output was offset by a drop in construction, leaving German industrial production unchanged on the month. But the year-on-year gain suggests positive momentum in German industry notwithstanding uncertainty surrounding Greece and Chinese weakness. On the other hand, the euro's decline on the back of the Greek crisis ought to support German manufacturers. (AM)
        U.K.:
        --May industrial production rose 0.4% on the month and up 2.1% on the year against respective expectations of up 0.1% and up 2.0%.
        --May manufacturing output fell 0.6% on the month and was up 1.0% on the year against respective expectations of up 0.2% and up 1.9%.
        Strong North Sea oil production helped offset soft manufacturing for the U.K. during May. But the manufacturing story isn't all bad news. The pick-up in oil output should boost production-related manufacturers during the coming months. More of a worry for the sector is euro weakness as it erodes British competitiveness. (AM)
        FRANCE: May trade deficit was EUR4 billion from EUR3.3 billion in April.
        A drop in manufacturing exports after three months of gains and rising imports of intermediate manufactures eroded France's trade position in May - though the latter suggests further export strength in the coming months. (AM)
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        (END) Dow Jones Newswires

        July 07, 2015 07:03 ET (11:03 GMT)

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