Updated: 07-27-2015

Relief in Greece and China Fails to Produce Follow-Through
Updated: 24-Jul-15  05:30PM ET
Analyst: David Kelland

On July 12th, Greek Prime Minister Alexis Tsipras and Greece's official creditors reached a deal that should keep Greece from leaving the eurozone for many months if not years. While
Greece's debt burden (around 170% of GDP) is unsustainable without haircuts, the deal seemed to be what the markets wanted. Traders avoided risky assets on days when Greece seemed more likely to head for the exit door and they bought those assets on days when a deal appeared imminent, with haircuts or otherwise.

Moving forward two weeks, the Greek deal was reached and the bargain has gained approval from all of the relevant institutions to vote on it. Furthermore, financial stress in China has been relieved as the Shanghai Composite has bounced 16.1% from its close on July 8th. The cherry on top should have been good results from corporate America.

And yet, the 10-year yield is 16 basis points lower than where it had closed on the Friday before the deal was reached. The Eurostoxx 50 has maintained some of its post-deal gains, but the German Dax and the S&P 500 have given back almost all of their gains from the deal-induced relief rally. Given how bad the news flow was before that Sunday agreement, one would have expected the 10-year yield to be holding higher and the equity indices to keep moving higher as happens in a bull market when the air has been cleared of bad news.

So if the 10-year note has rallied back and the 30-year yield made a 7-week high today, maybe the markets are concerned about something else.

The drubbing given to commodities like gold, oil, and copper has surely affected the minds of Treasury traders as has the U.S. Dollar Index back on the 97 handle.

Emerging market economies are hurt by the stronger dollar itself, but also the cheaper commodity prices that often come with it. The Chinese economy is faced with the unholy trinity (a term used by Gavyn Davies, former Goldman Sachs chief economist) of a burst property bubble, an impaired banking sector, and now a potentially imploding equity bubble. Emerging markets were supposed to be the growth engine in this new century.

I realize that there has been a lot of doom and gloom bandied about ever since the crisis. Those people have generally, except for a small exception in the summer of 2011, been made to look foolish. But, the market has received its easy solutions over the past two weeks and yet still failed to act optimistically. The bigger problems - the ones that cannot be signed away with a pen - remain.

- David Kelland, Briefing.com

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