Greek Drama Strikes Again

As we reach the midpoint of 2015 let's take a look at some of the financial topics making headlines:

1) Greece- In what has been an annual occurrence for the past five years, Greece has taken center stage once again. In January the Greeks elected the radical Syriza party, who promptly stated that they would not abide by the terms of prior agreements with the European Union. The party's platform included raising taxes, a significant increase in government spending, increasing government pensions, free electricity to all Greeks and refusing to make certain loan payments to creditors. It was many of these same policies that put Greece in the perilous position they find themselves in. 

We have made the point for many years that Germany gave the Eurozone the blueprint to economic growth fifteen years ago with pro-growth reforms. Unfortunately, the majority of European countries have not followed suit and continue to struggle with high taxes, excessive government spending and rigid labor markets. The results have included very sluggish economic growth and high unemployment.

Greece's Prime Minister Alexis Tsipras has called for a referendum on July 5th where Greeks will decide whether or not to accept creditors' austerity demands. If they vote no a Greek Eurozone exit would seem to be inevitable. Greek banks will remain closed all week as the government tries to prevent a banking system collapse.

It is important to remember that Greece's economy is very small, similar in size to the Detroit metro area. With this being the case it wouldn't seem that Greece leaving the Eurozone would cause a significant market disruption. However, in a financially interconnected world a seemingly minor financial event can begin a chain reaction that causes much larger market stress. 

2) China- China's Shanghai Composite is now down 22% over the past two weeks, sending Chinese stocks into a bear market. When you look beneath the headlines you will find that even after the 22% fall stocks are still up 25% year-to-date and have doubled over the past year. In recent weeks signs that Chinese stocks had run too far too fast were all around. Two examples- reports of Chinese farmers trading stocks instead of tending to their crops and margin debt crossing over $350 billion as Chinese investors borrowed money to invest. Investors who borrowed on margin can be forced to sell after market declines as institutions recall their loans. This selling can lead to larger market losses. 

3) United States- Stock markets in the U.S. remain in a tight trading range. Since mid-March both the Dow Jones Industrial Average and the S&P 500 have traded in a range of 3-4 percent with buyers stepping in at the lower end of the range and sellers emerging at the higher end. The longer stocks stay range-bound the stronger the break-out move tends to be, regardless of whether stocks break-out to the upside or the downside.

S&P 500

S&P 500

What are some of the issues that could trigger a break of the trading range? How strong will 2nd quarter earnings reports be, will interest rates continue their move higher and what will be the ultimate fall-out behind the scenes if Greece defaults?

These are just a few of the developments that will be worth monitoring in the coming months. Keep in mind that on topics ranging from Greece to China to U.S. earnings reports it is important to look beyond the headlines, where the important information lies.