From Greece to China
July opened with the Greek referendum on a proposed bailout package. Syriza, the current ruling party in Greece, campaigned against the proposal and told voters that it was a bad deal. The Greek people agreed and the proposal failed by a sizable margin. That provoked the European negotiators. After the next round of talks, the Greek prime minister emerged with a deal that was worse than what was offered in the recent referendum and told the Greek people that he would secure a better deal on their behalf. For now, the Greek government is working to comply with demands of their European neighbors and hoping to build enough trust to earn some relief from their debts.
Meanwhile, the stock market crash in China continues to unfold in slow motion. In recent years, it became common for analysts to praise the savvy of the Chinese government as it gradually moved towards a more open and capitalist economy. Both financial professionals and lay people pointed to the steady growth of the Chinese economy and to the outstanding returns of the Chinese stock markets as evidence of the strength of the Chinese economic juggernaut. In the past two months, opinions turned sharply and investors openly criticized the actions of the Chinese regulators’ to control its tumbling stock market. Some of their actions included limiting sales of securities, prohibiting short selling, and mandating holdings for institutional investors. While it’s possible to argue about the effectiveness of their efforts, many investors are concerned by their methods and what those methods say about the nature of the Chinese stock markets.
As one of the largest consumers of commodities and raw materials, China exerts significant influence over commodities markets around the globe. Now that the Chinese economy seems to be slowing, investors must reevaluate the outlook for commodities. Copper and aluminum are at multi-year lows and, despite a small rebound during the spring, oil is also stuck at depressed prices. Until the situation in China is clarified, investors can expect a tepid market for commodities. While some of the blame for depressed oil prices falls on China, oversupply is the largest factor. Over the past 15 years, North American oil production rebounded strongly.
During that time, OPEC, the international oil cartel, was content to maintain its production quotas, so long as prices remained high. When oil prices started to dip due to oversupply, OPEC decided not to cut production and to allow falling prices to eliminate their vulnerable competition. The most vulnerable producers are those in North America, which rely on more expensive methods of extracting oil. Just as the number of operational rigs started to decline, investors got word that economic sanctions on Iran might be lifted soon, which would allow Iran to sell its oil around the globe again and worsen the oversupply problem. When the deal went through in July, oil prices dropped again and it seems that a rebound is unlikely until investors know that these oversupply issues are resolved.