Why aren’t the markets worried about Greece?
I have said for some time that the consequences of Greece leaving the euro zone may be far greater than anyone realizes, but the market thinks otherwise.
The German stock market is rallying today, and is flat on the week. European markets are down only about 1 percent for the week. European bond yields are up, but not too dramatically. The S&P 500 is up 1.3 percent this week, and the CBOE Volatility Index is near the lowest levels of the year.
I’ve had many discussions with analysts and traders about this seeming indifference. Opinions vary, but there are four factors that show up in everyone’s list to explain the phenomenon:
1) Fatigue: After five years of crisis, everyone is over it.
2) Complacency: Most feel that a deal will be made, even if it is just a “kick the can” deal.
3) No contagion: Traders believe the European Central Bank when it said it would do “whatever it takes” to keep the euro together.
4) Containability: Finally, even if Greece leaves the euro, many have now convinced themselves the damage could be contained. Peripheral bond yields are only modestly elevated, with Spanish 10-year yields, for example, is at 2.24 percent.
It’s about time. Despite the decline, the Shenzhen stock market—which consists mostly of younger, tech-oriented companies–is still up 94 percent for the year.
Despite all the talk about opening up the Chinese stock market to outside investors through the Shanghai-Hong Kong stock link, this monster rally is almost entirely a domestic matter. Since November, there has been an explosion of new brokerage accounts in China. There were 4 million new brokerage accounts opened in March alone. Unlike U.S. and other developed markets, China’s stock market is driven largely by individual investors who hold stocks for a very short period of time. They get in fast and get out fast.
With millions of new first-time investors entering the market in the last six months or so, and with the Shenzhen up nearly 100 percent, it’s surprising no one that the market has gotten more volatile. First-time investors suddenly sitting on big profits, then suddenly seeing the market down more than 10 percent, are very likely to panic.
Two other factors affecting sentiment are a flood of new IPOs, and further moves to tighten margin financing.