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By HaleStewart July 5, 2015 6:10 pm
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International Economic Preview For the Week of July 6-10; Greece and China Causing Concern, Edition

     There are two events looming large over the markets next week.  Let’s start with Greece.  I’ve already added my 2 cents to this discussion when I made this observation:

Earlier this week, I noted that Greece just doesn’t have much left to cut; depending on your measurement, Greek GDP has contracted by at least 25%, unemployment is over 25% and the debt/gdp ratio has increased, indicating this great austerity experiment hasn’t accomplished its primary goal. Given those three metrics, there’s just not much left for Greece to do. Frankly, this situation is beginning to remind me of the war reparations situation at the end of WWI, where the allied powers decided to place such an onerous burden on Germany that the German economy had no direction to go but absolute collapse. And, if Greece had its own currency, then the previously cited metrics indicate they would actually be in good shape; they would now be the low-cost producer of literally every good made in Europe and their currency would be massively devalued, allowing them to export their way to prosperity. However, because they are tied to the euro, they really can’t get the real benefit of their cutting. As to how this think ends up, at this point it’s anybody’s guess. But, so far, I’m pleased that the carnage does seem to be contained to Greece.

As of this writing, Greece has rejected the latest offer from the EU:

Greeks delivered a shocking rebuff to Europe’s leaders on Sunday, decisively rejecting a deal offered by the country’s creditors in a historic vote that could redefine Greece’s place in Europe and shake the Continent’s financial stability.

As celebrants gathered in Athens’s central Syntagma Square, the Interior Ministry reported that with almost 90 percent of the vote tallied, 61 percent of the voters had said no to a deal that would have imposed greater austerity measures on the beleaguered country.

The no votes carried virtually every district in the country, handing a sweeping victory to Prime Minister Alexis Tsipras, a leftist who came to power in January vowing to reject new austerity measures, which he called an injustice and economically self-defeating. Late last month he walked away from negotiations in frustration at the creditors’ demands, called the referendum and urged Greeks to vote no as a way to give him more bargaining power.

This shouldn’t be surprising, considering Greece’s debt is unsustainable:

Euro zone countries tried in vain to stop the IMF publishing a gloomy analysis of Greece's debt burden which the leftist government says vindicates its call to voters to reject bailout terms, sources familiar with the situation said on Friday.

The document released in Washington on Thursday said Greece's public finances will not be sustainable without substantial debt relief, possibly including write-offs by European partners of loans guaranteed by taxpayers.

It also said Greece will need at least 50 billion euros in additional aid over the next three years to keep itself afloat.

What happens now is anybody’s guess.  Should Greece leave the EU, their first priority will be recapitalizing their banks.  To accomplish this they will have to cannibalize existing accounts to a certain extent and attempt to get additional capital from the markets.  But the cost will be extremely high.  Without some type of help from third parties, it will be very difficult.  But, without help, Greece will be ripe for political instability, and, given their geographic location, it’s highly doubtful the EU as a whole will simply hang them out to dry.  It’s also possible that we could see a renegotiation of their debt situation as a result of the vote.  Realistically, expect a fair amount of confusion and conflicting signs as the parties try and figure out the next move.

     There is also the Chinese market, where the bubble has clearly burst:

The above chart shows the Shanghai index has dropped 28% in a matter of a few weeks.  Prices have moved though major support levels, momentum is now negative and relative strength is non-existent.  The next logical area of support is the 200 day EMA which is also the same level as the 50% Fibonacci retracement level.  The Chinese government has cut rates on several fronts, quietly tried to ban some short-selling, stated that state pensions would now be able to invest in stocks and is supposedly putting together some type of stabilization fund.  None of this has helped.  Stay tuned. 

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