While markets are fixated on the Greek vote, the reality outside of the small European nation is a paradigm shift resulting in increasingly illiquid and more volatile financial instruments. China proved the real harbinger of times to come as efforts to end the rout in stocks have initially fallen short of expectations. The roundtrip volatility in major benchmarks over the course of one session is very uncommon, reflecting the herd mentality amongst newly minted Chinese retail traders. Greece may be a looming black swan on a macroeconomic level; however, the real danger to the global economy lies not in the birthplace of democracy, but rather the great eastern dragon: China. Summer months are notoriously illiquid periods for financial markets with the old adage for stocks being “sell in May and go away” reflecting the traditional seasonal declines of equity markets. This summer however, the stakes are much higher as evidenced by the tumult circling the globe. Globalization has its benefits, but it also means the entire financial system is daisy-chained together. A move in one economy creates ripple effects worldwide.
When China catches a cold, the world economy is generally not far behind. With some of China’s biggest trading partners becoming less active in the global trade space and the domestic economy not transitioning to a consumption based model as quickly as policymakers had hoped, the politburo has its back up against the wall. The increasingly accommodative efforts of the People’s Bank of China belie the idea of stabilization, but rather seem to indicate a hard-landing scenario is already underway. Policies reflect that shift as China increasingly looks abroad via economic initiatives to engage in infrastructure projects that will help it reestablish its preeminence in global trade hearkening to the days of the Silk Road. However, these developments are still years away, meaning the immediate financial conditions in China are more worrying than previously thought. With the Chinese Central Bank expected to go ahead and introduce quantitative easing in the coming months, the risk of magnified volatility beyond what has been experienced from Greece is a present and enduring risk for the near-to-medium term outlook.
Volatility to Pick Up
Andamento del mercato - 06/07/2015