Headlines about the sharp sell-off in Chinese stocks and the ongoing Greek impasse provide the backdrop for today’s action, with the major indexes on track to continue the positive Fed-inspired momentum.
Chinese stocks have been red hot lately, but they fell sharply this week. The Shanghai composite was down -6.4% in Friday’s session, ending the week in correction territory, down -13.3%. This sell-off follows a similar weakness late last month, but the trend then reversed and stocks were back in record territory.
There is no one factor driving the sell-off, though worries about valuations, high margin debt levels and increased supply of IPOs have been growing lately. Anecdotal evidence of “bubblicious” behavior among Chinese stock market investors have been cropping up lately, reminding us of the late-1990’s behavior from the U.S. market. Chinese stocks have been the best-performing in the world this year despite the ongoing slowdown in the country’s economy, likely reflecting the fiscal and monetary stimulus measures from the authorities.
It will be interesting to see if the Chinese authorities will stand aside as the air flows out of the market or if they will step in to stop the rot. But irrespective of how the Chinese story unfolds next week, we know that the never-ending Greek drama will still be playing next week as well.
Thursday’s meeting in Luxembourg between Greece and its creditors failed to make any headway, and another meeting is scheduled for next week. The country has a big payment due to the IMF at the end of the month and failure to reach a deal with its creditors will essentially mean that they will have to default.
The IMF has made it known that the June 30th deadline is for real and that there will be no extensions or grace periods. But we know that all of these decisions have big political components. A deal could come through in the end, but it is increasingly becoming likely that Greece may finally have to leave the currency union.
In corporate news, we got a weak earnings report from CarMax (KMX), a strong one from KB Home (KBH), while Hershey (HSY) preannounced with a lowered outlook.
Related podcast interview:
Puru Saxena: Still Bullish on Chinese Stocks – But Not as Cheap as Last Year
