Weekly Market Update – 5th July 2015

• The Greek population has voted NO in the referendum on agreeing to proposed austerity measures. Greece may now have to confront the prospect of Europe withdrawing financial support, which could result in a herculean task of stabilising its banking system, exiting the Euro and introducing a new currency. As with Greek mythology, there are few prosperous endings when debt and politics are involved.

• Greece’s crisis has dramatically intensified with political squabbling, bank closures and a missed debt payment . The Greek Government called a referendum for July 5th to decide whether to accept the conditions required by the European Commission, European Central Bank and International Monetary Fund (IMF) as creditors. Essentially Greece wants their creditors to reduce the debt obligations and moderate the various budget, labour market and pension targets required. The Greek Prime Minister has accused Europe of using “blackmail” and advocated a NO vote to these bailout conditions at the referendum.

• Greek banks have been closed since Monday June 29th. Given that Greek banks were heavily dependent on the European Central Bank (ECB) providing cash given falling deposits, the ECB decision to cap funding at Euro 89 billion has seen Greek banks close to avoid a cash crisis (also known as a “bank run”).

• The Greek government has also missed a debt repayment to the IMF on June 30th. This effectively constitutes a default, although the IMF has diplomatically termed this debt as in “arrears”.

• The US recorded solid jobs growth in June of +223,000, indicating that US economic activity continues to strengthen after a cold start to the year. The unemployment rate has fallen to 5.3%, the lowest since April 2008. This jobs data suggests the Federal Reserve (FED) is likely to start raising interest rates in September.

• Australian economic data has been a mixture of strong and weak. May’s retail spending recorded only a modest monthly gain of +0.3% after April’s marginal -0.1% decline. However residential building approvals for May have responded favourably to the RBA’s interest rate cut. Total Housing approvals rose by +2.4% in May, with annual gains now registering at a robust +17.6%. The strength has been concentrated in the volatile private apartment sector where the annual gain is an astonishing +46%.

• Global Shares have fallen over the past week. US shares (S&P 500 Index) have declined by -1.2%. Both Germany’s DAX (-3.4 %) and the broader European Eurostoxx Index (-4.4%) have recorded sharp declines given concerns over Greece. Japan’s TOPIX has fallen by -1%. China’s Shanghai Composite continues its roller coaster ride having fallen sharply by -9.6 % for the week.

• Australia’s ASX 200 has proven more resilient with a modest -0.2 % fall for the week. Australian shares benefitted from takeover activity (Asciano A$9 billion takeover offer from Brookvine Infrastructure).

Major global economic events and implications