Chinese bond market, Greece and Fed weigh on markets

Chinese bond market, Greece and Fed weigh on markets

By Craig Erlam on Dec 10, 2014 08:16:06 GMT

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  • Chinese sell-off overnight weighs on sentiment in Europe and the US;
  • Greek snap election possible as Samaras brings forward Presidential election;
  • Speculation of more hawkish Fed spooks investors;
  • UK GDP estimate and US job openings data in focus.

It appears we’ve entered the week of the jitters in which any news is perceived to be bad news and any lack of news is filled with speculation of worrying events to come.

In the last 24 hours alone we’ve seen a massive sell-off in China after the nation’s clearing agency announced that it will no longer accept bonds with ratings below AAA or those issued by companies rated below AA as collateral for repos. Repos allow a holder of collateral to obtain a short term loans, but following the new announcement, around 470 billion yuan of outstanding debt will no longer be eligible. This hit the value of this debt hard and the impact of it was felt throughout the Chinese markets, including Chinese stocks with the Shanghai Composite falling more than 5%.

At the same time, the eurogroup of finance ministers agreed to give Greece an extra two months to meet the conditions of the bailout, prompting the country’s Prime Minister Antonis Samaras brought forward the Presidential election to this month from February. Samaras has been backed into a corner recently because under Greek law, if a new President isn’t elected – which requires at least 180 of 300 lawmakers to vote for the Prime Ministers candidate – Parliament must be dissolved and snap elections held.

The problem with this is that the ruling coalition only has a 155 seat majority meaning they need 25 supporting votes from smaller parties. If they don’t get this, there will be snap elections which could create a much bigger problem in that Syriza currently leads in the polls and under their rule, any agreement between Greece and its lenders would be extremely difficult to reach, setting the country back significantly. At this stage, this is very unlikely to have the impact on the eurozone as it would have in 2011, but at a time when investors are already on edge, it does appear to be another excuse to sell.

On top of all this, there have been reports that the Fed is considering removing a particularly dovish section from the statement that it releases alongside its monetary policy decision, the next of which is due next week. For a long time now, the FOMC has committed to keeping rates at record lows for a “considerable amount of time” after the end of the third program of quantitative easing, which came in October. The removal of this phrase will be viewed by the markets as a sign that the first rate hike is imminent, which could well spook investors.

In reality, this should be celebrated as it means that, as Friday’s jobs report suggested, the economy is recovering well and no longer needs such strong support from the country’s central bank. However, with stock markets trading at record high levels as investors search for yield and Treasuries also trading near highs, the actual reality is that we may need to see markets correct, something all investors appear to be perfectly aware of and fearing.

There isn’t a huge amount of economic data being released today and the majority of what is being released is unlikely to have much of a market impact. Of interest though is the UK NIESR GDP estimate for the three months to the end of November, which should give some insight into how the economy is performing in the final quarter of the year with only a month to go. We also have the US JOLTS job openings for October, which is expected to rise to 4.823 million, not far from October’s high of 4.853 million.

The S&P is expected to open 8 points lower at 2,052, the Dow 64 points lower at 17,788 and the Nasdaq 19 points lower at 4,259.

About Craig Erlam

Craig Erlam is Market Analyst at Alpari UK. He joined Alpari (UK) at the beginning of 2012 after four years in the financial services industry, including working at Goldman Sachs. Craig writes market commentary that regularly appears on websites including The Financial Times, Reuters, BBC, The Telegraph and FOX Business. He also provides insight and analysis for clients which he posts daily on Twitter, Google+ and the Alpari (UK) website. You can also find Craig on YouTube where he gives short market updates, including charting analysis.

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