(courtesy Bill Holter/Holter-Sinclair Collaboration)

When it comes to Greece, and Europe in general, “hope” continues to remain the driving strategy. As Bloomberg’s Richard Breslow summarizes this morning, “if you were looking for a word to describe the general feeling of equity markets today, you might well pick hopeful. U.S. equity futures opened higher and have been up all day. European bourses opened cautiously higher as they await word, any word, from the European finance ministers or more importantly, Chancellor Merkel. Equity markets will continue to be very reactive to European headlines, but so far, no news has been taken as a reason for hope.” Which incidentally, has been the general investment case for the past 6 years: “hope” that central banks know what they are doing.

Today’s latest Eurogroup meeting at which Greece is expected to somehow provide a new deal proposal that will re-engage the European finmins after Greece resoundingly said “Oxi” to the last, more permissive proposal, is just the latest indication that nothing else but hope remains.

We’ll know in hours if the hope was again in vain, because as the ECB quite clearly hinted yesterday, no deal and the ELA haircuts continue only the next time it will be a bail in, especially since overnight the ECB issued a new document where the debt monetizing bank quite amusing, decried the danger of moral hazard warning that the ELA could be {a threat to the financial independence of the NCB, for instance if ELA was not provided against sufficient collateral to safeguard such independence, an obvious concern about a possible breach of the monetary financing prohibition, or provision of ELA at overly generous conditions, which, in turn, could increase the risk of moral hazard on the side of financial institutions or responsible authorities.” One just has to laugh at the hypocrisy.

A place where there is no laughter this morning, and almost no hope was China where after rebounding modestly by a little over 2% yesterday, the massively propped Shanghai Composite dropped again, this time sliding -1.26%, with a far greater crash spared due to the rolling halt of trading of increasingly more stocks as the entire stock market is slowly but surely getting CYNKed as we warned last week.

It gets worse: as FT reports, sares on China’s benchmark index slid again on Tuesday, defying attempts by policy makers to halt the worst month-long fall in more than two decades. Since Monday’s close, more than 200 companies have halted trading in their shares, joining a growing number of businesses trying to shield themselves from the market tumble.

According to the Securities Times, 760 companies — more than a quarter of all A-share listed companies on the Shanghai and Shenzhen exchanges — had suspended trading in the past week. That has frozen $1.4tn worth of equity, according to Bloomberg calculations — about a fifth of China’s stock market value. The sell-off that began on June 12 has wiped roughly $3tn off the market, in the country’s steepest decline since 1992, according to data from Bloomberg.

And for those following technicals, the 200 DMA is fast approaching after which not all the firepower of the PBOC may prevent the biggest stock bubble of 2015 going not only red for the year but wiping out all 20 million new entrants.

It’s worth highlighting just how extreme the moves have been of late and the volatility in China equities was certainly no more evident than yesterday’s trading session where we saw intraday high-to-low ranges for the Shanghai Comp and Shenzhen Comp of 8.1% and 11.3% respectively. The Chinext index of smaller companies actually saw the range top 13%. In an eye-opening day of price action, the Shanghai Comp initially opened just over 7% higher following the measures over the weekend to attempt to stabilize equity markets. Within an hour that gain was halved before the bourse actually dipped into negative territory shortly after we went to print yesterday, only to then recover slightly into the close and finish +2.41%. The measures implemented over the weekend now feel like a distant afterthought. In the meantime the nations’ media has again tried to lend its support to calm nerves with the Securities Journal this morning suggesting that the Chinese economy has the basis of a long-term bull market, while yesterday’s People’s Daily reported a headline ‘Confidence is more precious than gold. That’s what Chinese investors need at this moment; confidence, not panic’.

China equities are still one of the better performing asset classes YTD, however a significant portion of these gains have now been wiped out with the moves of the last three weeks. At the June 12th high, the Shanghai Comp had risen +60% YTD. Those gains have now shrunk to +11% and so putting it behind the Nikkei and in-line with a number of European equity markets. The numbers are even more eye-popping with the Shenzhen which at one stage had risen +122% YTD, only to now be +36%. Quite amazing price action.

Meanwhile, Chinese companies traded in Hong Kong fell 20% from a May high, following mainland shares into a bear market. The Hang Seng China Enterprises Index sank 3.3 percent to 11,827.30 on Tuesday, led by Citic Securities Co. Haitong Securities Co., Citic Securities and China Railway Group Ltd. dropped the most on the H share gauge during the period, posting declines of at least 37 percent. The city’s benchmark Hang Seng Index entered a correction on Monday, sliding 11 percent from its April peak.

“It’s not easy for the market to regain confidence, and until that happens Hong Kong may remain under pressure,” said Linus Yip, a Hong Kong-based strategist at First Shanghai Securities Ltd. “We need to see whether China’s policies can support the mainland shares.”

So far the answer is no.

Away from China, Asian equities rebounded from yesterday’s sell-off ahead of today’s Eurogroup meeting. Nikkei 225 (+1.3%) and ASX 200 (+1.9%) rose with latter bolstered by gains seen in industrials. JGB’s rose 16 ticks with support seen heading into the CPI JGB bond auction.

European equities have started the session on tentative footing (Euro Stoxx: -0.1%) after yesterday’s sharp losses as participants await the Eurogroup meeting and Euro summit later today (1200BST/0600CDT and 1700BST/1100CDT respectively). Price action has been driven by equity specific news flow this morning with many participants awaiting the aforementioned meeting of Greek creditors.

Yesterday saw sources indicate that the ECB increased its haircuts on Greek collateral for ELA to 45% and refuse a request from the Greek central bank to increase the ELA by EUR 3b1n, thereby toughening terms of its support to Greek banks by eliminating the buffer available. This has contributed towards Bunds outperforming their US counterpart this morning, with the German benchmark higher by over 75 ticks as the Greece saga continues with no sign of a deal as of yet.

In FX, the Greenback (USD Index: +0.6%) has strengthened this morning as a result of EUR/USD price action, with the pair weaker by around 80 pips on the back of yesterday’s ELA news, while participants await the aforementioned European meetings later today.

This USD strength has in turn weighed on GBP/USD, to see the pair reside in negative territory despite mixed UK Manufacturing (-0.6% vs. Exp. 0.1%) and Industrial Production (0.4% vs. Exp. -0.2%) seeing an uptick in the pair. Of note, Bank of America analysts note that short USD positioning by HF and RM accounts is close to matching last year’s highs, highlighting the scope for long USD positions to increase.

Commodity linked currencies are trading weaker across the board today, with the focus on the growing concerns over the economic slowdown in China, as the PBOC and other regulatory bodies continue to try to prop-up the stock market. Overnight, the RBA decided to keep rates unchanged at 2.00% as expected, adding that further deprecation is needed in AUD and that monetary policy needs remains supportive, while CAD weakness linked to pre-positioning ahead of the next week’s BoC decision, with expectations growing for the bank to turn more dovish.

Despite the weakness in commodity currencies, the energy complex has seen a bout of strength during today’s session in a mild rebound following the worst slide in prices since February. Meanwhile, Gold traded lower overnight as some of yesterday’s safe haven gains were ebbed away by the strength in the USD. Elsewhere, Copper fell to a 5 month low and Dalian iron ore futures fell to a 3 month low as growth concerns in China continue to weigh on commodities.

Looking ahead, as well as the aforementioned European meetings, today sees US Trade Balance, JOLTS Job Openings and API crude oil inventories.

Bulletin Headline Summary from RanSquawk and Bloomberg

• USD (+0.5%) has strengthened this morning as a result of EUR/USD price action, with the pair weaker by around 80 pips on the back of yesterday’s ELA news.
• Commodity linked currencies are trading weaker across the board today, with the focus on the growing concerns over the economic slowdown in China, as the PBOC and other regulatory bodies continue to try to prop-up the stock market.
• European equities have started the session on tentative footing after yesterday’s sharp losses as participants await the Eurogroup meeting and Euro summit later today.
• Treasuries gain led by 5Y and 7Y notes as Greece and China’s efforts to combat stock rout remain in focus; week’s supply begins today with $24b 3Y, WI 0.95% vs. 1.125% in June.
• Tsipras is heading to Brussels in a last-ditch effort to secure a rescue and keep Greece in the euro region; Merkel said yesterday that “time is running out”
• ECB yday maintained Greek ELA ceiling to Wednesday, raised collateral haircuts; Greece is scheduled to sell 26-week bills tomorrow; refinance EU2b in bills on July 10
• Foreign investors are selling Shanghai shares at a record pace as China steps up government intervention to combat a stock- market rout that many analysts say was inevitable
• Chinese companies traded in Hong Kong fell 20% from a May high, following mainland shares into a bear market
• German Vice-Chancellor Sigmar Gabriel said in interview with Stern that it was “naive” to accept Greece into euro and cutting Greece’s debt load without prior economic policy changes won’t restore sustainable public finances
• While fresh ECB aid is needed to keep Greek banks ticking, injections of capital from shareholders, bondholders or even customers’ savings may be inevitable, according to a person with direct knowledge of discussions on lenders
• 50% of respondents in a French poll want Greece to leave the euro, with 7% supporting total cancellation of Greek debt, 22% partial cancellation, 55% extension of maturities without cancellation
• More stimulus efforts can be expected from China’s government as President Xi Jinping seeks to keep the collapse from devouring the savings of tens of millions of Chinese investors — a constituency larger than the Communist Party — and from potentially setting off social unrest
• World powers and Iran are on the verge of missing another deadline in Vienna, where diplomats are in a 10th straight day of talks seeking an accord over the Islamic Republic’s nuclear program
• Sovereign 10Y bond yields mostly lower; Greek 10Y yields 18.265%. Asian stocks mostly lower; Shanghai falls 1.3%, Shenzen down 5.3%. European stocks mixed. U.S. equity-index futures gain. Crude oil gains, WTI and Brent remain below $60/bbl; gold and copper lower

DB’s Jim Reid completes the overnight event summary

I was never a great chess player but we are currently in a classic stalemate. I don’t think it lasts long but both sides in the Greece impasse had reason to be comfortable yesterday. Although Tsipras has been politically emboldened by his impressive victory, one can’t help think that the Europeans’ tough stance was enhanced yesterday by another subdued market reaction to the chaos. Italian, Spanish and Portuguese 10 year yields were ‘only’ 14bp, 16bp and 24bp wider respectively. Clearly not positive but to re-use our phrase from last week we’re in ‘controlled risk-off’ mode. Equities moved in a similar vein with the DAX and CAC ‘only’ off -1.52% and -2.01% respectively. The Italian FTSE MIB was -4.03% but it’s still up +13.62% YTD so hardly a panic. Credit is generally watching in relative calm at proceedings with very few clients having much interest in testing what would probably be very bad liquidity.

All-in-all hardly a scenario for the Europeans to scurry around reviewing their stance. Indeed after Europe closed the ECB announced it was maintaining current levels of ELA, but was increasing haircuts on Greek bank ELA collateral. The haircut amounts were not disclosed so it’s impossible to know the consequences (ie whether it takes Greek banks close to being technically insolvent) but as a minimum it seems to be a gesture to increase pressure on the Greeks. The ECB will likely wait until after today’s Euro leaders summit before contemplating accelerating things further.

We should find out at the leader’s summit what the European preconditions are (if at all) for a re-start of negotiations. DB’s George Saravelos thinks that they will be tough. For example the start of talks on a new ESM program requires Bundestag ratification before negotiations can begin. George thinks it unlikely that Merkel concedes to this unless PM Tsipras essentially commits upfront to a similar package from the last round of negotiations. Once the summit is over, the ball will once again be back in Tsipras’ court and as George remarks, the entire process will be back where we left it two weeks’ ago, the only difference being the massive pressure on the Greek economy. At the end of the day it might be this, the continued capital controls and ongoing bank closures that means Tsipras’ post referendum honeymoon is unsustainable.

Ahead of the summit and in a meeting between German Chancellor Merkel and French President Hollande, Merkel reiterated that the ‘door for talks remains open’ but that ‘time is running out’ and that it will be ‘very important’ for Tsipras to present a plan for moving forward at today’s summit. Hollande largely echoed those views, saying that ‘the door is open to discussions’ and that ‘it’s up to the government of Tsipras to make serious credible proposals’. Elsewhere, having been quoted on ORF TV after the US close, Governing Council Member Nowotny suggested that a bridge loan to Greece under certain preconditions before an ESM program is agreed is a possibility. Nowotny did also downplay any hopes of reaching an accord with Greece this week.

Meanwhile, shortly after we went to print yesterday we got the news that the now former Greek Finance Minister Varoufakis has resigned. His replacement was announced as Euclid Tsakalotos who is generally seen as more moderate in his views (certainly relative to Varoufakis) and in any case has been involved in leading negotiations for the last few months. An important move by Tsipras perhaps in trying to show a credible commitment to get negotiations back underway.

So what would we have to talk about if it wasn’t for Greece? Well quite a lot actually, we’d have Yellen’s semi-annual testimony next week to get excited about, we’d have US earnings season (Alcoa kicks us off tomorrow), the mini-crash and huge volatility in Chinese equities and also the recent slump in oil.

Well Chinese equity markets are doing their best to grab some of the attention away from Greece again this morning with the Shanghai Comp (-3.19%) and Shenzhen (-5.59%) taking yet another steep leg lower. Amazingly, the Shenzhen is now nearly 14% off early Monday’s high while the Shanghai Comp is 8% off these highs.

It’s worth highlighting just how extreme the moves have been of late and the volatility in China equities was certainly no more evident than yesterday’s trading session where we saw intraday high-to-low ranges for the Shanghai Comp and Shenzhen Comp of 8.1% and 11.3% respectively. The Chinext index of smaller companies actually saw the range top 13%. In an eye-opening day of price action, the Shanghai Comp initially opened just over 7% higher following the measures over the weekend to attempt to stabilize equity markets. Within an hour that gain was halved before the bourse actually dipped into negative territory shortly after we went to print yesterday, only to then recover slightly into the close and finish +2.41%. The measures implemented over the weekend now feel like a distant afterthought. In the meantime the nations’ media has again tried to lend its support to calm nerves with the Securities Journal this morning suggesting that the Chinese economy has the basis of a long-term bull market, while yesterday’s People’s Daily reported a headline ‘Confidence is more precious than gold. That’s what Chinese investors need at this moment; confidence, not panic’.

We highlighted yesterday that China equities have still been one of the better performing asset classes YTD, however a significant portion of these gains have now been wiped out with the moves of the last three weeks. At the June 12th high, the Shanghai Comp had risen +60% YTD. Those gains have now shrunk to +11% and so putting it behind the Nikkei and in-line with a number of European equity markets. The numbers are even more eye-popping with the Shenzhen which at one stage had risen +122% YTD, only to now be +36%. Quite amazing price action.

Looking at markets elsewhere in Asia this morning, aside from the steep moves in China it’s a mixed picture across other markets in the region. The Nikkei (+1.18%) and ASX (+1.64%) have both firmed, while the Hang Seng (-1.17%) and the Kospi (-1.06%) are trading down. Asia credit is unchanged while 10y Treasuries have moved 1.3bps wider.

Moving on, July hasn’t been a kind month for the oil market so far and yesterday was no exception after we saw Brent (-6.27%) and WTI (-7.73%) tumble to $56.54/bbl and $52.53/bbl respectively. The slump for WTI in particular was the biggest one-day decline since November 28th last year, while the intraday move in Brent was only topped by the sharp downturn on March 4th this year. Yesterday’s slump appeared to be a combination of three factors. Along with the heightened tension around Greece and extreme volatility in China, talks between Iran and world powers on a nuclear deal which could see sanctions lifted on the nation also played a part. Yesterday’s moves have now seen WTI and Brent decline over 11% this month so far and taking them now to -0.90% and -1.38% YTD respectively.

So although Greece is dominating a lot of the market direction at present, it’s probably not so much of a coincidence that the sell-off in oil has also coincided with Fed Funds contracts trading at or near their lows for the year so far with the move perhaps softening the inflation outlook again. Indeed yesterday we saw the Dec15 contract fall 1.5bps to 0.275%, a fresh low for the year. Dec16 (-7.5bps) and Dec17 (-11bps) contracts also took a steep leg lower to 0.955% and 1.630% respectively, the former now also at a fresh YTD low and the latter just 15bps off the early February lows.

In terms of the remainder of the price action yesterday, it was a fairly decent performance for US equities yesterday given the Greek news and with a sell-off in energy stocks adding to the pressure. The S&P 500 finished -0.39% at the close, paring an initially weaker opening. 10y Treasuries ended 9.7bps lower in yield at 2.286% while the Dollar index ended up +0.19%. There wasn’t a whole lot to take away from yesterday’s data. There was no change to the final revision of the June services PMI at 54.8, meaning the composite stayed at 54.6 which was down 1.4pts from the May reading. ISM non-manufacturing for the same month rose 0.3pts to a below market 56.0 (vs. 56.4 expected) reading while the labour market conditions index printed below consensus (0.8 vs. 2.0 expected). In the European timezone we saw an above market German factory orders print for May, albeit weak at -0.2% mom (vs. -0.4% expected). Elsewhere the Euro area Sentix investor confidence reading rose 1.4pts to 18.5 (vs. 15.0 expected).

Looking at today’s calendar now, events with Greece and specifically the Euro Leaders Summit tonight is set to be the focus for much of the market. Aside from that, data wise in Europe this morning we’ve got German industrial production, French trade data and UK industrial and manufacturing production readings to look forward to. In the US this afternoon we get an important input into Q2 GDP with the May trade balance reading, while JOLTS job openings and the IBD/TIPP economic optimism print are also due.

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