Chinese stocks fell again on Friday.
The Shanghai Composite Index fell 1.1 percent today to end July with a 15 percent loss, its biggest monthly drop since August 2009.
Despite the decline, Chinese stock valuations remain very high. According to Bloomberg data, the median stock on mainland bourses trades at 66 times earnings, higher than in any of the world’s 10 largest markets.
After plunging 8.5 percent on Monday, there could be more losses to come for the Chinese stock market. From Bloomberg:
Chinese stocks will decline by an additional 14 percent over the next three weeks as the market demonstrates a trading pattern that mimics that of the U.S. crash in 1929, according to Tom DeMark, who predicted the bottom of the Shanghai Composite Index in 2013.
Bank of America strategist David Cui also thinks that there could be more falls for Chinese stocks. This would the result of excessive leverage, which "means relentless selling pressure", and that "A-shares ex. banks could at least halve".
Cui concluded that "what just happened in the A-share market will likely have profound impact on China’s economy and financial system".
China’s stock market plunged on Monday.
The Shanghai Composite Index fell 8.5 percent to 3,725.56 at the close, the biggest decline since 27 February 2007.
Recent economic data from China had been negative.
On Monday, a report showed that profit at China's industrial firms fell 0.3 percent in June from a year earlier, reversing a 0.6 per cent rise in May.
Data on Friday showed that China's factory sector contracted the most in 15 months in July as shrinking orders depressed output.
In recent weeks, China's stock market had been recovering after sufferring heavy losses in June and early July. The Shanghai Composite Index fell by a third in the latter period but had rebounded 16 percent since the low on 8 July.
In the wake of the bailout agreement for Greece last week, Goldman Sachs has upgraded its view on European stocks.
"European equities have been one of the key asset classes to benefit from a fading of Greek risks following their drawdown," Goldman Sachs wrote in its Global Opportunity Asset Locator report published on Monday.
It upgraded its three-month view on European equities to "overweight" while downgrading US stocks to "underweight". It expects the STOXX Europe 600 to return 1.9 percent, 5.1 percent and 12.9 percent in local currency terms on a three-month, six-month and 12-month basis respectively.
The Bank of America Merrill Lynch Fund Manager Survey for July published last week also found that views on European stocks were positive. "Despite the Greek news flow, intention to own European assets is high and rising, though global growth remains vitally important for European stocks," said Manish Kabra, European equity strategist at BofA Merrill Lynch Fund Manager Survey.
Still, economists remain pessimistic about Greece's ability to stay in the euro group. A Bloomberg survey of 34 economists showed that 71 percent of them think that there is still a danger that Greece will be forced out of the euro region by the end of 2016.
Greece's bailout agreement last week has given it a chance to make payments to its most important creditors. From Bloomberg:
Greece gave the order to repay 6.8 billion euros ($7.4 billion) to creditors after last week’s tentative bailout deal, the Finance Ministry said, as Greek banks reopened three weeks after closing to prevent economic collapse.
The payments ordered Monday by the Greek government include money owed to the European Central Bank, the International Monetary Fund and Greece’s central bank, said a Finance Ministry official who asked not to be identified in line with government policy. Greek financial markets remain closed, the country’s market regulator said in an e-mailed statement.
China's economy grew 7 percent in the second quarter from a year earlier, the National Bureau of Statistics reported on Wednesday, the same rate as in the first quarter.
The news failed to boost the stock market though. The Shanghai Composite Index fell 3.0 percent, declining for the second consecutive day.
Analysts remain optimistic on the Chinese stock market though. About 60 percent of analysts surveyed at 19 Chinese brokerages and asset management companies expect A shares to gain in the third quarter, the Shanghai Securities News reported.
A bailout deal for Greece was finally agreed to on Monday. Bloomberg reports:
Prime Minister Alexis Tsipras surrendered to European demands for immediate action to qualify for up to 86 billion euros ($95 billion) of aid Greece needs to stay in the euro.
After a six-month offensive against German-inspired austerity succeeded only in deepening his country’s economic mess and antagonizing his European counterparts, there was no face-saving compromise on offer for Tsipras at a rancorous summit that ran for more than 17 hours.
Implementing the creditors' demands will not be easy though. The Greek parliament will have to pass into law key creditor demands, including streamlining value-added taxes, broadening the tax base to increase revenue and curbing pension costs, by Wednesday. Another Bloomberg report says that Tsipras is already facing mutiny at home over these demands.
Bloomberg reports today that European leaders have given Greek Prime Minister Alexis Tsipras three days to enact their main demands to keep alive chances of getting another bailout, failing which Greece's continued membership in the currency union would be in jeopardy.
Leonid Bershidsky thinks that financially, a bailout still makes sense for Europe. "In total, the potential losses from a massive Greek default appear to outweigh the pain of investing another 53.5 billion euros over the next three years," he wrote in his Bloomberg column last week.
John Hussman appears less sure.
In his latest commentary today, he wrote that the jump in the prices of Greek government debt last week on hopes of an 11th hour agreement for a bailout by the European Union still left Greek bonds priced to reflect a default probability of 100 prcent at every maturity. "The jump only reflected an increase in the amount that bondholders evidently expect to recover in default," he wrote.
"While a can-kicking bailout is still possible, it’s not at all clear that it would be desirable for anyone in the longer-run," he added.
Hussman warned: "Beyond Greece, the greatest concern is the fact that much of the Greek debt burden is held by financial institutions that have inadequate capital buffers. The largest European banks today have higher gross leverage ratios than similar U.S. financial institutions did at the peak of the housing bubble."
Which means that even if Europe failed to bail out Greece, it may still have to bail out its financial institutions.
The slide in the Chinese stock market is showing no sign of coming to an end.
The Shanghai Composite Index fell 5.9 percent today to a three-month low at the close. The CSI 300 plunged 6.8 percent. Hong Kong's Hang Seng Index fell by 5.8 percent.
Despite the continuing decline, at least one analyst remains bullish on Chinese stocks. Kinger Lau, China strategist for Goldman Sachs, predicts that the CSI 300 will rally 27 percent from Tuesday’s close over the next 12 months as government measures boost investor confidence and monetary easing spurs economic growth.
“It’s not in a bubble yet,” Lau said in an interview. “China’s government has a lot of tools to support the market.”
World markets were only mildly shaken by the result of the Greek referendum on Sunday, which saw a rejection of further austerity.
The S&P 500 slipped 0.4 percent on Monday while the STOXX Europe 600 fell 1.2 percent. The euro lost 0.5 percent against the US dollar while US 10-year Treasury yields fell 10 basis points to 2.29 percent.
Japan's Economy Minister Akira Amari thinks that Greece’s economic meltdown underscores how austerity alone cannot solve a nation’s fiscal problems. From Bloomberg:
Greece is “cutting expenditure and raising taxes, and as a result, tax revenue has fallen further,” Amari said in a July 2 interview at his Tokyo office. “It’s proof that you can’t fix finances by just raising taxes and cutting spending without increasing tax revenues by restoring the economy...”
“There is no fiscal reform without economic revitalization,” Amari said. “Without continuing to steadily boost growth and increasing the size of the economic pie, just hiking taxes and cutting spending would leave us squirming.”
Unfortunately for Japan, hopes of boosting economic growth may prove to be a pipe dream, what with its population shrinking.
Indeed, according to another Bloomberg report, only four cities among the 71 most-populous urban centers ranked by the United Nations are poised to shrink between 2014 and 2030, and all four are in Japan, including Tokyo.
Half a century ago, the Tokyo Olympics ushered in a golden age for Japan’s capital, as industrial prowess made it the largest urban complex in history. Now the games are returning to mark the end of that growth.
US stocks look expensive, according to Jim Rothenberg, chairman of Capital Group Companies.
In an interview with FinanceAsia, he said that US companies are trading at 17-19 times earnings.
"If you hypothesise higher interest rates, those valuations can't be supported," he said.
Nobel Prize-winning economist Robert Shiller also thinks US stocks are expensive.
He recently told CNBC that his cyclically adjusted price-to-earnings ratio "is higher than it's been, except 1929, 2000 and 2007", all of which were years that were followed by large market losses.
