Daily Agenda: Gravity Returns to Chinese Stock Market
Germany’s finance minister muses on euro zone unified financial authority; Teva announces acquisition of Allergan’s generic drug business.
The Shanghai Composite index came close to a collapse today with a decline of 8.5 percent in a single session, bringing the total decline since Thursday to double-digit territory as China’s markets see turbulence despite Beijing’s best efforts to curb volatility. The decline measures as the sharpest intraday stumble since February 2007 and brought the MSCI emerging-markets index to a multiyear low. Although the National Bureau of Statistics today reported a decline in industrial profits for June that is part of a long-term pattern of moderating growth for the sector, the market’s swoon appeared to be driven by emotional forces rather than fundamental factors or macro narratives. Simply put, Beijing’s extreme intervention efforts have failed to inspire confidence in investors at home or abroad, with equities on the mainland remaining at nosebleed valuations.
Schaeuble considers further euro zone financial integration. In an interview with German newsweekly Der Spiegel, German Finance minister Wolfgang Schaeuble discussed the possibility of a unified tax and finance authority for the euro zone as a partial prescription to some of the political rifts that emerged during the Greek crisis negotiations. This follows a report published earlier this year under the direction of European Commission President Jean-Claude Juncker that discussed a similar concept.
Europe sees growth in money supply. The euro zone’s M3 money supply rose by 5 percent year-over-year according to data released this morning by Eurostat, a figure slightly weaker than consensus forecasts. Critical private loan data remained weak at 0.6 percent year-over-year as small businesses in the region continue to struggle to access credit, particularly in peripheral economies in the south of the Continent.
German business confidence rebounds. Ifo business sentiment indexes released today for July made gains, with the headline index up for the first time in three months at 108. The current conditions subindex rose to 113.9 from a prior 13.1, as corporate leaders in the euro zone’s largest economy shock off concerns over Greece.
Teva to buy Allergan generics business. In the latest megamerger announced in the pharmaceutical sector, on Monday Israeli company Teva Pharmaceutical Industries agreed to acquire Dublin–headquartered, Parsippany, New Jersey–based Allergan’s generics franchise for a combined $40.5 billion in cash and stock. Teva’s shares rose sharply in premarket trading as investors wagered that the increased international scale of the company’s generic drug capacity will lift the firm’s prospects while scuttling earlier attempts to acquire Dutch pharma Mylan. Allergan itself was acquired by Actavis, a company known for its generics-heavy background. Allergan officially adopted the name of its merger company last month.
Portfolio Perspective: U.S. Dollar Pulls Back — Kit Juckes, Société Générale
Being long dollars feels more like riding up the Alpe d’Huez today than basking in the sunshine on the Champs-Elysées. It might be worth it in the end, but it’s going to hurt. Data from the Commodity Futures Trading Commission show a further buildup of longs, and the U.S. rates market is more range-bound than powering ahead in anticipation of an interest rate hike by the Federal Reserve. This morning, all eyes are on the Chinese equity market, falling sharply after two weeks of narrower ranges and steady bounce, though it’s notable that the dollar is getting no bid from this against the China-sensitive currencies.
All eyes are going to be on the Federal Open Market Committee’s policy announcement midweek, which is likely to be neutral in keeping with the Fed’s intention to be data-dependant and the second-quarter GDP data on Thursday, which Société Générale economists forecast to post a solid 3.3 percent increase. That should keep the Fed on track for a September rate hike, though sub-$50 oil and Chinese market turmoil will continue to muddy the waters.
Kit Jucke is a currency strategist for Société Générale in London.