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Daily Agenda: Volatility: Fear Not, My Friends

ECB’s Draghi supports IMF on debt relief for Greece; Chinese stocks rise for the week; Abe scraps plans for pricey Olympic stadium.

After a brief run-up in the wake of the Greek referendum, volatility has declined sharply in the U.S. with the CBOE Volatility index (VIX) registering its second-biggest five-day decline this week since its inception in 1990. Despite an earnings season that has so far produced mixed guidance and lingering concerns over macro risks — notably the ongoing Greek debt saga — investors appear to have little or no fear. It seems as if only a policy shock is capable of sparking any degree of panic in markets as the summer continues.

Draghi supports IMF on Greece. Today European Central Bank President Mario Draghi announced increased liquidity assistance for Greek banks and publicly supported the International Monetary Fund’s calls for relief of the country’s debt. The cash infusion will allow banks to open in Greece on Monday for the first time in three weeks, although capital controls will remain in place initially.

GE proposes deal to EU. General Electric Corp. today submitted plans for the proposed $13 billion acquisition of power industry assets of Alstom that are intended to address European Commission antitrust concerns. The acquisition would leave only two major producers of gas turbine products in Europe. Separately, in its quarterly earnings announcement today, GE reported a second-quarter net loss of $0.13 per share, or $1.36 billion.

Chinese equities rise for the week. The Shanghai Composite index closed up 3.5 percent on Friday to lock in a 2.1 percent gain for the week, the second consecutive winning week for the benchmark since regulators in Beijing intervened in the market’s plunge. Reports indicate that the government-controlled China Securities Finance Corp. has taken in 2.5 trillion yuan to 3 trillion yuan ($483 billion) in additional funding from banks to continue to support margin lending by brokerages.

Plans for Tokyo Olympic stadium cancelled. Japanese Prime Minister Shinzo Abe announced today that the planned stadium to host the 2020 Tokyo Olympics, designed by star Iraqi-U.K. architect Zaha Hadid, will be canceled and replaced with a more cost-effective design yet to be selected. In excess of $2 billion, the athletic facility had become a flash point for taxpayer ire.

Portfolio Perspective: Brexit Now More LikelyAlbert Edwards, Société Générale

The biggest unforeseen impact of the Greek debt crisis is that the country’s agreement makes it far more likely that the U.K. will leave the European Union after the 2017 referendum. Traditionally the left has been a big supporter of the EU project. More recently, the so-called rejectionists have more recently been right-wingers in the Conservative Party, many of whom have split away to the U.K. Independence Party. Even when the Labour Party is not in power, the EU has dictated worker-friendly policies in the U.K. to be implemented in the face of the more laissez-faire tendencies of the Tories.

For those of you who believe that the U.K. left, in the manifestation of the Labour Party, is a spent political force in the wake of the Conservative’s surprise election victory, I would point out one thing. Despite all the stats about Labour winning only 232 seats in parliament (a net loss of 26) and being 100 seats behind the Conservatives (331 seats and a net gain of 24) you would have expected Labour’s national vote to have collapsed — especially with a net 40 seat virtual wipe-out in Scotland. In fact despite Labour’s Scottish disaster, the U.K. national Labour vote actually rose 1.5 percent to 30.4 percent. And most surprising of all, that is a bigger rise in the national vote than the 0.8 percent rise Conservatives achieved. Contrary to what you read, Labour and the left are still a potent force in U.K. politics and the events last weekend have shattered many a left-wing illusion about the euro zone and the whole EU project.

Albert Edwards is the chief global strategist for Société Générale in London.

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