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June promises to be a momentous month

Published Monday, June 1st, 2015

Today is the first day of a potentially momentous month. By the end of it we will have clarity on OPEC’s production policy for the next six months, we will know if Greece has defaulted and whether an Iranian nuclear deal will be done. By the end of the month oil prices could be $10 bbl lower, the euro could be at parity with the dollar, equity markets could have had a 10% correction and bond markets could have experienced a meltdown.

Getting the month off to a poor start are warnings from the ECB in their latest financial stability report of serious risks sitting in the shadow banking sector. The sector has taken over roles previously performed by banks and the ECB warns that a “fragile equilibrium” exists in world markets with underlying risks that can only be guessed at. It is a repeat of the many other liquidity warnings we have received based on worry about crowded trades, crowded exits, liquidity mismatches and stretched leverage levels. In the ECB’s more sober language “Initial asset price adjustments would be amplified, triggering further redemptions and margin calls, thereby fuelling such negative liquidity spirals”.

We had another tantrum last week, this time surrounding the Chinese stock market which lost 6.5% on Thursday and nearly repeated it on Friday but managed to recover. The Shanghai index has risen over 130% in the last 12 months and the Shenzen is up 100% since the beginning of the year. The tantrums are spread around and keep going away but the pre-quakes are becoming more regular. There is a looming one over Greece after another week of farce ended with no resolution and Christine Lagarde admitting that Grexit is a possibility. If you want reassurance that all will be well try this comment attributed to her in an interview with a German newspaper that a Greek exit “will not be a walk in the park” but it will “probably not be an end to the euro”.

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Posted by David Hufton