“Europe is already surrounded by a geopolitical ring of fire.”
Stocks are sacred. Except those in Greece where no one knows when banks will reopen and what currency or IOUs or whatever they will dispense when they do reopen, and no one knows how Greek businesses are supposed to function under these circumstances, how they’re supposed to pay their employees and produce and sell things and provide services. And no one knows what Greek stocks are worth because the Athens Stock Exchange remains closed.
But elsewhere, stock valuations must be propped up no matter what happens in Greece.
On Monday morning in Tokyo, during the first minutes of trading, the Nikkei was down 1.6% despite the ongoing QQE by the Bank of Japan. So BOJ Governor Haruhiko Kuroda himself stepped in.
While the BOJ’s underlings were – the markets assumed – busy buying equity ETFs as promised in the BOJ’s QQE action plan, Kuroda came out in the classic manner with a statement to jawbone the markets in the right direction:
Although direct economic and financial linkages between Japan and Greece are limited, the Japanese Government and the Bank of Japan remain fully prepared to deal with possible developments in Greece. In this respect, the Japanese Government and the Bank of Japan convened a meeting this morning.
The Bank of Japan, in close cooperation with relevant domestic and foreign authorities, will continue to carefully monitor developments in financial markets.
Finance Minister Taro Aso said the government was confident that the EU had established enough safeguards to respond to market disruptions. “I understand that European countries … are calling on the Greek government to act responsibly,” he said.
Then Reuters added this:
Both Kuroda and Aso did not mention how Tokyo may respond if developments in Greece jolt markets. But the central bank’s first line of defense would be to inject massive liquidity to calm markets, sources have told Reuters.
It did the job, or so it seemed. Stocks halted their slide and bounced a little. But then the magic dissipated, and the Nikkei swooned over 500 points before ticking up a smidgen to close down 428 points or 2.1%.
In Europe, where few of the policymakers that have to deal with Greece appear to have gotten much sleep, the ECB will step in and do its magic, according to a note by Geopolitical Research of Canada’s National Bank Financial:
In the short term, the European Central Bank will attempt to manage the fallout from the Greek vote and potential Grexit by significantly increasing its purchase of government bonds and other debt from the remaining Euro zone countries in order avoid a dramatic rise in yields.
Everyone is expecting this, and the expectation alone will limit the selloff. To make sure everyone gets it, the ECB said on Monday in a press release that it is “closely monitoring the situation in financial markets” and is “determined to use all the instruments available within its mandate.”
That would be the short-term aspects. Over the longer term – say, over three days – Europe faces one heck of a mess, according to the folks at NBF’s Geopolitical Research:
Europe is already surrounded by a geopolitical ring of fire. Large parts of North Africa and the Middle East are in chaos, Ukraine is beset by civil war and economic collapse, and relations with Russia remain tense. The collapse of Greece would mean that Europe would have to worry about yet another quasi-failed state on its periphery.
Eurozone markets closed deeply in the red: the German DAX down 1.5%, the French CAC 40 down 2.0%, the Spanish IBEX 35 down 2.2%, the Italian MIB down 4.0%…. Italy feels the pain.
Then there’s China. It has its own problems: a wondrous stock-market bubble that has become a national priority but has been crashing for three weeks; and an economy that has entered a hard landing and is now at risk of getting hammered by the very stocks that had propped it up over the past 12 months. The Chinese government doesn’t need Greece to feel panic.
Anticipating what a No-vote would do to stock markets around the globe, and thus to China’s elaborate stock-market rescue efforts cobbled together in emergency meetings last week and this weekend, Chinese authorities acted swiftly, and before anyone else.
On top of all the other measures already decided by that time, late Sunday the market regulator, China Securities Regulatory Commission (CSRC) announced that the PBOC would inject capital into a CSRC subsidiary, the China Securities Finance Corp, so that it would deploy these funds to encourage brokerages to lend even more money to their clients so that they can buy even more stocks on margin.
When I wrote about this spectacle on Sunday, I concluded: “Watch the fireworks when this moolah ignites.”
And it did ignite. At the open, the Shanghai Stock Index soared over 300 points as all these widely hyped efforts had some effect. Then the magic wore off, and at one point, the index dipped into the red, before closing up 89 points.
“But don’t just look at the index. Most investors are still crying: 646 stocks down vs 259 up in Shanghai; 1071 down vs 226 up in Shenzhen market,” George Chen at the South China Morning Post observed. The largest companies and state-controlled entities carried the market. The rest, forget it.
The small-cap and tech focused ChiNext index plunged 4.3%. And Hong Kong’s Hang Seng, being left to its own devices, plunged 828 points or 3.2%, the biggest one-day drop since 2011. Another sign that central banks are approaching the end of their desperate road to manipulate stock markets endlessly higher.
After having lured even street vendors and farmers into highly leveraged stock market positions that have now collapsed, is the Chinese government worried about popular upheaval? Read…. Panicked Chinese Government Imposes Desperate Measures to “Aggressively” Rescue a Lot More Than Just Crashing Stocks
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