29 June 2015

Shares in Asia fall sharply on Greece woes, Shanghai down despite PBOC

The Nikkei 225 fell 2.10%, while the S&P/ASX 200 was down 2.05%. TheShanghai Composite fell 3.75% despite an easing by the People's Bank of China at the weekend, and after falling 7.4% on Friday.

central banks and financial officials around the region from Japan and Australia as well as earlier in the United States moved to assure markets they were monitoring the fallout from the collapsed Greece debt talks and ready to act if needed.

Greece's banks and stock exchange are expected to remain closed throughout the week following a recommendation from the country's Financial Stability Council late Sunday, according to reports.

The move came just hours after the European Central Bank froze Emergency Liquidity Assistance (ELA) support to the country's banks at levels agreed on June 26 - a figure estimated to be around €90 billion.

"The Governing Council is closely monitoring the situation in financial markets and the potential implications for the monetary policy stance and for the balance of risks to price stability in the euro area," the ECB said in a statement. "The Governing Council is determined to use all the instruments available within its mandate."

At the weekend, Greece's parliament approved a move put forth by Prime Minister Alexis Tsipras for a national referendum that will decide the fate of the country's bailout negotiations on July 5.

The poll effectively ended stalled talks in Brussels and likely ensures that Greece will be unable to make a "bundled" €1.55 billion payment to the International Monetary Fund on Tuesday - the same day its current (extended) bailout program expires.

Later, U.S. Treasury Secretary Jack Lew spoke to Tsipras Sunday and stressed the need for all sides to continue to work towards a solution.

In Japan, industrial production fell 2.2% month-on-month in May, more than the 0.8% expected decline, while retail sales rose 3.0%, better than the 2.3% gain seen in May year-on-year.

Also reported were remarks from Bank of Japan Governor Haruhiko Kuroda who said the central bank is alert to downside risks to its aims to anchor 2% inflation by the first half of fiscal 2016.

Japan's consumer inflation has slipped back to around zero due partly to "the temporary influence of low oil prices," he told a panel discussion at an annual general meeting of the Bank for International Settlements in Switzerland. His remarks were released Monday.

"While our projection is that inflation will be in the neighborhood of 2% most likely around the April-September period of 2016, the risks to that scenario cannot be ignored, particularly when the global economy is full of uncertainty, including over geopolitical factors," Kuroda said.

At the weekend, the People's Bank of China cut interest rates and its deposit rate to 4.85% and the deposit rate to 2% respectively from Sunday.

The PBoC also announced that it will cut the reserve requirement ratios (RRR) by 50 basis points for commercial banks serving rural areas, agriculture and small businesses.

The PBoC has now cut interest rates four times since November and this year also reduced the amount of cash banks must keep in reserve three times, as well as using other measures to inject liquidity into the market.

In the week ahead, investors will focus on the referendum to be held on July 5 on the terms proposed by lenders for extending the country’s bailout program.

European finance ministers refused to extend Greece’s bailout beyond Tuesday, despite Greek requests to extend the program until after the referendum.

Market participants will also be looking ahead to the latest U.S. employment report, due for release one day ahead of schedule on Thursday, for signs of improvement in the labor market, which the Federal Reserve has said is a key factor in deciding when to start hiking interest rates.

In the euro zone, Germany and Spain are to release preliminary data on consumer inflation. The U.K. is to publish data on net private lending.

Later Monday, the U.S. is to publish a report on pending home sales.

Last week, U.S. stocks were mixed after the close on Friday, as gains in the Utilities, Financials and Consumer Services sectors led shares higher while losses in the Technology, Basic Materials and Healthcare sectors led shares lower.

At the close in New York, the Dow Jones Industrial Average added 0.32%, while theS&P 500 index lost 0.03%, and the NASDAQ Composite index lost 0.62%.