MorningWord 7/6/15: Bull in a China Shop

by Dan July 6, 2015 9:38 am • Commentary

OK, so a lot happened over our holiday weekend. Obviously the Greek referendum is the lead story. As usual, I have no way to tell you what comes next. And based on what I have read over the last few weeks, few economists, strategists, traders or pundits do either.  One who has been doing a great job laying it out so you can play it out Mohamed El-Erian. Here was his latest from Bloomberg View; 10 Consequences of Greece’s ‘No.

Lots of peeps much smarter than I are focused on sovereign yields and the movement of the Euro currency vs the dollar, I am not exactly sure how to trade U.S. stocks off of that, but watching European Banks stocks, specifically the Euro Stoxx Bank Index (SX7E) has been a useful input. The SX7E is at a fairly critical near term support level which coincides with the index’s 200 day moving average at $145, a level it has not been below since mid February:

Euro Stoxx Bank Index 1 yr chart from Bloomberg
Euro Stoxx Bank Index (SX7E) 1 yr chart from Bloomberg

When you back out the chart to the start of 2007 what becomes fascinating is just how depressed European Bank stocks remain (down 70% from their 2008 highs) relative to U.S. bank stocks, some of which recently made new all time highs.  What’s apparent is that the financial crisis never ended for Europe:

SX7E 8 yr chart from Bloomberg
Euro Stoxx Bank Index SX7E 8 yr chart from Bloomberg

Oh and then there is the bubble that is Chinese equities. Again nothing too insightful aside from the fact that last night’s opening 7.5% bounce following the unprecedented efforts announced over the weekend to attempt to stabilize the equity market declines, for all intents and purposes failed to do so.  Prior to the open of the Shanghai Composite I tweeted the following important support level:

Over the next week the most important event may be that the Shanghai Comp holds at support. The announcement that Chinese brokerages and fund managers established a $19.3 billion stabilization fund is a bit of a joke when you consider they are attempting to stem $3 trillion in losses over the last month.

Make no mistake, it was a full on mania over there in the stock market, and there will be fits and starts with violent counter-trend rallies. And depending on how serious the government is in propping the markets, maybe a new high.  It is important to note that despite the Shanghai Comp’s nearly 30% declines from the June highs, it is still up 85% from its 52 week lows, so once it breaks support, I suspect it will overshoot on the downside as it did on the upside.

To sum up, Euro Bank stocks are weak as expected, the Euro is not as weak as expected (read Brian Kelly’s reasoning for this on our sister site The Ticker District), U.S. Treasuries are up as expected, Sovereign yields in Europe are not up nearly as much as expected and Asian stock’s aside from Shanghai got nailed.  All in All, the response to the Greek people’s No vote to their referendum on a bail out is a bit muted. In my mind the threat of contagion is greater from a Chinese equity crash as opposed to Grexit, at least in the near term.