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PA ANALYSIS: Has the market just looked down?

In the old Road Runner cartoons, Wile E. Coyote spent a lot of time running on air. Having run off a bridge or a cliff, he would remain remarkably buoyant for a while. Then he would look down and, of course, plummet to the floor.


Just how accurate a metaphor for global financial markets this is, depends largely on how bearish you are. And, it is safe to say that the ranks of bears will have been swollen by the movements in the Chinese equity markets on Friday and the latest machinations in Europe around Greece over the weekend. But, importantly, they don’t seem to have grown as much as might have been expected.

On the Chinese front, the equity market falls, while severe, did not seem to come as much of a shock, as my colleague, Sean Butters, wrote on Friday. And, while the twin rate cuts announced over the weekend were a surprise, they are also a clear indication that the People’s Bank of China has no intention of letting markets go unattended.

As Aidan Yao, Senior Emerging Market Economist at AXA Investment Managers explained: “We think the latest policy easing has demonstrated a very strong official intention to generate a “soft-landing” in the equity market. In that regard, should the selloff continue at the current pace, further market support measures could be announced in the coming days.”

The Greek question is a much tougher nut to crack. The breakdown of negotiations between the Greek government and its creditors, the surprise referendum on austerity scheduled for Sunday and the capital controls in place until then saw European markets fall hard on Monday. But there was also rather a lot of resignation in the commentary coming out around it.

This type of view is well represented by the views of Dominic Rossi, global CIO of equities at Fidelity Worldwide Investment, who said on Monday that we are currently seeing the maximum level of concern about Greece: “Soon though, investors in New York and Beijing will be thinking about more local issues such as the prospect of a Fed rate hike in September and further rate cuts in China. These decisions are more likely to have a profound impact on equities than the concluding chapter of a well-documented Greek default.”