The Greece situation remains as complicated today as it was yesterday, though today’s positive stock market action in Europe likely indicates that market participants on that side of the pond see some light at the end of the tunnel.
I find it hard to see any solution that can meet both Greece’s immediate needs and address the creditors’ concerns. Our markets have thankfully moved past Greece, but the fixation today with China makes perfect sense. China is a far more critical issue than Greece, and developments in that country don’t look encouraging at present.
The Shanghai Composite dropped -5.9% in today’s session, with the index now down more than 30% from its mid-June high. The concerning part of this crash is that it appears to be out of hand from the Chinese authorities who staked their reputation on the line by coming out with what appeared to be a comprehensive support mechanism. But it hasn’t worked, which is very problematic in that country’s command economy.
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In effect, the omnipotent Chinese authorities have found their match in that country’s stock market. Chinese stocks have had a phenomenal run this year – they are still up on the year despite the pullback in the last three weeks – in disconnect with the broader economy which was steadily losing steam. The question now is whether these negative developments will remain confined to the stock market or will have further ripple effects in the broader economy, which wasn’t doing so well to begin with.
In corporate news, the 2015 Q2 earnings season starts getting into the spotlight today with Alcoa’s (AA) earnings release after the close. The company is expected to earn 23 cents on $6.1 billion in revenues, up from EPS of 18 cents on $5.8 billion in revenues in the year-earlier quarter. The stock has been really hit hard lately, down almost -30% year to date, primarily reflecting the pricing problems in the over-supplied aluminum markets.
More than positive or negative EPS and revenue surprises in today’s report, it will be management’s commentary on the state of aluminum demand that will determine how the stock reacts in tomorrow’s session. And it all comes down to China, whose weakening growth momentum has been weighing on the outlook for a host of commodities, including aluminum. The ongoing stock market sell-off in that country has raised fears that the ground economic reality could be worse than what official statistics are suggesting.
