Four Developments to Note while the US is on Holiday

US markets are closed for the celebration of its Independence Day.  There are four developments to note today.  

1.  FX Price Action:  The US dollar is little changed against most of the major currencies.  The notable exception is the Australian dollar.  It has been sold to new six-year lows to near $0.7500.  Recall that is the level that RBA Governor Stevens previously identified as reasonable.  This illustrates one of the problems of nominal and bilateral exchange rate targets.  The continued negative terms of trade shock (e.g. iron ore prices have renewed their decline) and knock-on impact from poor Chinese developments make whatever fair value means more dynamic.  The next technical target is near $0.7450. 

2.  The sharp sell-off in Chinese stocks continued.  The Shanghai Composite fell nearly 5.8% earlier today to bring the week's loss to 12%.   Poor economic news did not help, but the reversal is taken a lift on of its own.  As we have seen repeatedly in other markets, the use of leverage (margin in China) exacerbates the advance and decline.  It is not simply about PBOC policy, which has been eased.  It is about money management.  Separately, the HSBC services PMI and composite fell.  The former fell to 51.8 from 53.5 and the latter to 50.6 from 51.2.   Lastly, we note that ChemChina won EU regulatory approval to buy Italy's Pierelli for 7.1 bln euros.

3. The final eurozone services PMI was unchanged from the flash reading of 54.4, which was an improvement on May's 53.8 reading.  However, it conceals some potentially important developments.  First, the German flash estimate of 54.2 was revised lower to 53.8.  This is still an improvement from May (53.0) but is in line with other survey data warning that the momentum may be easing.  Ironically, the French reading of 54.1 puts it ahead of Germany.  Italy's service PMI also improved.  Its reading stood at 53.4, up from 52.5 in May, and slightly above expectations. It is best since last June.  Spain was disappointing.  It slipped to 56.1 from 58.4.  This is the lowest reading of the year.  The consensus was for no change.  The picture that emerges is that some redistribution of growth may be taking place in the euro area.  German and Spain, which had been strong, have softened, while France and Italy, which have been laggards, are showing better traction.    Separately, we note that the UK's service PMI rose to 58.5, beating expectations for 57.5 after 56.5 in May.  

4. Polls for the Greek referendum suggest a statistical tie. The polls also show the vast majority of Greeks want to remain within the monetary union.  Syriza is campaigning hard to for a "no" vote to reject the official creditors demands.  Ironically, there have been several defections from its far-right junior coalition partner favoring the a "yes" vote.    Syriza officials have tried playing down the momentous nature of the referendum, suggesting that a deal will be worked out immediately following the referendum.   Varoufakis has claimed that an agreement has been reached on everything but debt relief and that a no vote would secure this. This does not ring true and strikes me as an effort to encourage a "no" vote, by suggesting that the implications will not be so severe.  As we have noted, the official creditors have offered debt relief in the past, predicated on Greece achieving certain austerity goals.  A "no" vote will not move this higher on the agenda though a "yes" vote that sees the current government collapse could see more details in an agreement with a new government. While many observers are focused on the sovereign debt obligation to the ECB in late July, my concern is the current situation cannot persist that long.  Clearly on a "no" vote, at its Monday meeting, the ECB cannot increase the ELA borrowings.  However, it is not clear, that they can on a "yes" vote.  Greek banks were already teetering on insolvency and that ongoing deposit flight, albeit slower, and the further erosion of the economy pushes them over the edge.  The rating agency Fitch has opined that the four largest Greek banks would have already failed if not for the ELA. The Emergency Liquidity Assistance is not to prop up insolvent banks, but to help those faced with a liquidity challenge.  

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