A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the World Wide Web.
There are mornings when it's a struggle to find stories for this daily links post and there are others like today when I have to speed up my metabolism with four cups of coffee before even considering trying to digest overnight news.
Chinese markets – all of them – took another pounding overnight. According to the Financial Times' Simon Rabinovitz, 51 per cent of Chinese equities were halted and another 38 per cent stopped trading during Wednesday's session after falling the maximum 10 per cent. With only 11 per cent of Chinese equities trading, investors sold anything they could find to raise cash – bonds were down big and the trading in commodities was horrific; iron ore, coke, copper, nickel, rebar, zinc, lead, rubber and silver all reached the market limit for daily losses.
The big question remains the government's motivations – why are they freaking out about an equity market that has frequently ignored economic fundamentals? The potential for social unrest – much of the huge investment flows into equities this year were from retail investors who won't be enjoying their monthly statements going forward – is the obvious answer.
U.K. market pundit Tomas Hirst suggested another reason for government panic. Mr. Hirst announced on Twitter that he is about to publish a report arguing that profit-taking in real estate markets provided the funds for the early-year surge in Chinese equity markets. I'm speculating, but the government could be concerned about a "double whammy" – a sharp fall in real estate investment (the sector has been the basis for the country's economic miracle, in simple terms) with the potential for a big chunk of the profits erased in equities.
"China's plunging stock markets have virtually shut down" – Quartz
"China's pledged collateral and those margin calls" – Kaminska, FT Alphaville (free with registration)
"China Market Rout Spreads From Stocks to Price of Pig Food" – Bloomberg
"China Rout Spills Into Debt, Currency Markets" – Wall Street Journal
And for something completely different; "Goldman Sachs Says There's No China Stock Bubble, Sees Rally" – Bloomberg
Goldman Sachs analysts re-iterated their bearish view on oil prices this morning with a $45 (U.S.) per barrel price target for the commodity. I don't have the full report yet, but Twitter helpfully provided an excerpt which I believe to be accurate. They note that "June preliminary production came in well above our forecasts with a surge in OPEC production… the first rise in U.S. oil rig count since December suggests producers can ramp up activity given improved returns at $60/bbl with costs down nearly 30 per cent."
"We continue to forecast the global oil market surplus will materialize in a product surplus this fall, pushing crude oil prices and refining margins lower with higher OPEC production further overwhelming even stronger demand growth than we forecast."
"Goldman forecasting WTI at $45/bbl by Oct." – Goldman Sachs, Twitter
Greece is still a mess, in case readers were wondering. The European Commission threatened to cut off support for the nation's banks on Sunday – plunging them immediately into insolvency – unless a deal for debt repayment was reached.
The Economist reports that a Greece exit from the European Union is now the "base case" for Europe. For what it's worth, I think this conclusion is premature. Certainly European equity markets don't agree – they are higher this morning.
"Greece Faces Euro Exit Unless Demands Accepted by Sunday" – Bloomberg
"Euro-zone leaders demand Alexis Tsipras offer them a deal harsher than the one Greek voters just rejected. Grexit seems imminent" – The Economist
An important column from the Financial Times' John Authers would be getting a lot more attention if China weren't melting down and the European Monetary Union experiment at risk of collapse. Mr. Authers is advocating a wholsale change in the global financial system whereby the industry gets paid more for good performance than just raising assets. This is, of course, heresy in Canada and much of the world,
"Fees are too high. Set in an era when stock returns were far higher than they are likely to be in the future, and before cheap index-tracking funds, the chunk taken by active managers can no longer be justified.
But the deeper problem concerns incentives. By paying a management fee as a proportion of assets under management, we pay managers to accumulate assets, not to beat the market. Like everyone else, they do what they are paid to do, and manage their assets so as to minimise the risk that clients pull their assets out – and this leads them to herd together."
"A performance-linked model for fund fees" – Financial Times
Diversion: "Redditt is Revolting" – Wired