In hindsight you can see why the last meeting between Greece and its creditors occurred on Saturday. They needed the weekend, while the markets were closed, to sort out the preliminary details of Greece’s potential exit from the Eurozone.
The first of those is a referendum, to be held next Sunday. This will give the Greek people a chance to vote on the bailout deal and whether they want to stay in the Eurozone under the current conditions.
Prime Minister Alexis Tsipras is urging a no vote. He believes the bailout terms are too harsh and will condemn Greece to years of poverty.
And on Sunday night, he appeared on television to announce the imposition of capital controls and the closure of Greece’s banks as well as the Athens stock exchange. As the Financial Times reports:
‘Greece has closed its banks and imposed capital controls to prevent financial chaos following the breakdown of bailout talks with its international creditors.
‘The dramatic move came at the end of a weekend which saw Greece lurch closer to a potential exit from the European single currency, confronting the eurozone with a rupture unprecedented since its launch in 1999.’
The reason for the capital controls is due to a European Central Bank announcement on Sunday saying they would no longer provide loans to Greece’s banks. It did, however, say that it ‘stands ready to reconsider its decision’.
Sounds like very, very high stakes brinkmanship. Right now, neither sides looks like blinking.
The current ‘bailout’ program expires on Tuesday, and negotiations have broken down over the terms to extend it. Tuesday also represents the deadline to repay the IMF €1.6 billion. Once the deadline passes, Greece will technically be in default.
Greece is labouring under the weight of a massive debt burden. The ‘bailout’ programs simply ensure the repayment or rollover of existing loans, with the squeeze on the Greek economy adding a few billion here and there to the repayment schedule.
As I’ve said before, it was a bailout of the banks that lent Greece stupid sums of money in the first place. Now German and other European taxpayers are on the hook for the Greek debt, which is why there is such political will to keep Greece in the debt repayment vice.
But now both sides have had enough and are calling each other’s bluff. It could get ugly. From the Financial Times again:
‘Escalation in the Greek debt crisis is widely expected to trigger a sharp reaction on financial markets on Monday. A key focus will be on eurozone sovereign bond markets for any sign of contagion hitting “periphery” countries, including Spain, Italy and Portugal.
‘William Dudley, the president of the Reserve Bank of New York, said Greek risk was a “huge wild card”. He warned in an interview with the Financial Times that the financial market implications of a Greek exit from the euro could be graver than many investors seemed to believe, because it would set a “huge precedent” indicating that euro membership was reversible.
‘“My personal view is if this goes badly the market reaction may be bigger than what we realise,” he said.’
You’re not meant to leave to Eurozone and return to your own currency. It will give the other peripheral European nations ideas…and evidence that your economy can survive and even thrive by having a competitive and independent exchange rate.
As I mentioned a few times recently, the risk of contagion is the biggest risk for global financial markets right now. Portugal is next in the firing line so if you want to know whether this crisis is getting out of hand, keep an eye on Portugal’s sovereign debt yields.
The dramatic start to the week isn’t only confined to Europe. The Chinese stock market bubble is at risk of bursting. The shanghai composite index fell 7.4% on Friday, prompting the People’s Bank of China (PBoC) to cut interest rates on the weekend.
Will the addition of more monetary stimulus fire Chinese stocks back to new highs? Who knows? During the bubble phase, things get pretty wild. Big swings are common. It’s no different in China.
So what does the Aussie market think of all this? On Friday, you may remember I got Jason McIntosh, who runs the Quant Trader service, to give us his take on the market.
He used a long term chart to show that the overall trend for Aussie Stocks (since the 2009 bottom) was bullish. There are many ways to interpret charts, depending on your timeframe. Jason likes to look for big trends and ride them for a long time. That’s the way to make the biggest gains.
So he’s prepared to wear some short term pain to make sure he sticks with the overall trend. On Friday he acknowledged that you will likely see some more downside in Aussie stocks. But the point was, the big picture trend was still bullish.
I thought you might be interested in what it would take to make Jason change his views. So I asked him, and this is what he said:
‘Flexibility is the hallmark of a good trader. The ability to assess information objectively is something that separates the best from the rest.
‘You could say a good trader is like a fair weather friend. They’ll be there for the best of times. But you won’t see them for dust when things sour. There’s no loyalty when it comes to trading.
‘Successful traders don’t have ridged views. This allows them to reverse positions when conditions change. It’s a clinical, unemotional, way to trade. And it works.
‘Many traders struggle with this. Instead, they’ll stick to their guns…they’ll back their analysis. This often keeps them in a losing trade too long.
‘Last week, I wrote about the All Ordinaries. I said the market’s big picture trend remains up.
‘But this will change…sooner or later. The million dollar question is when.
‘The first indicator I use to answer this is the moving averages. I use 50 and 100 day averages to gauge the direction of the trend. And these recently took a turn for the worse.
‘Now this isn’t enough on its own to signal a bear market. The averages sometimes turn lower during a corrective period. Becoming bearish too soon can be a trap.
‘But it is a time to be cautious.
‘What I’m watching now is the price action. The key level is a support zone between 5100 and 5000. I’ll give the bull the benefit of the doubt while this holds.
‘The price action will continue to evolve in the coming weeks. So stay flexible. Nothing is set in stone.’
If you want to learn more about Jason’s trading methods and discipline, click here. Or read on…
For The Daily Reckoning, Australia