As the Greek crisis entered a new stage and a severe correction in the Chinese equity markets took place, financial markets entered some turbulent times. Volatility in equities and government bonds increased. While Greece was making the biggest headlines, the steep fall in Chinese shares is potentially more worrisome for the global markets.
After the Greek “no” vote in the referendum over the aid-program, a Grexit scenario became the base case scenario for many. Against most expectations, Greece reached an agreement on 13 July with its creditors over the reforms needed to start talks for a third bailout in five years and to remain in the euro. A final agreement on this bailout program is not expected before September implying several more weeks of uncertainty.
While Greece is making the biggest headlines, events in China are potentially more worrisome for global markets. After several attempts by the government to stop the correction, Chinese markets seem to be stabilising. Given the massive involvement of retail investors, the large sell-off may impact confidence and put further pressure on economic growth.
There were also concerns related to the outlook for US interest rates, oil prices and a weaker global cycle. We tactically neutralised our stance on equities, but moved to a small overweight again as the headwind stemming from Greece faded somewhat. We moved government bonds from a small underweight to neutral, upgraded real estate from neutral to a small overweight and cut commodities from a small to a medium underweight.