The Week Ahead: Greece, China, and the Fed

U.S. investors are shrugging off a spectacular development in the European crisis (see below), with the Dow Jones Industrial Average (Dow Jones Indices:^DJI) and the broader S&P 500 (S&P Indices:^GSPC) down just 0.21% and 0.30%, respectively, at 1 p.m. EDT. The technology-heavy Nasdaq Composite was down 0.4%. Even the CBOE Volatility Index (^VIX 1.78%), a market measure of expectations for near-term volatility in the S&P 500, is essentially unchanged, up just 4.71%. 

A Greek tragedy gets more complicated 
As analysts and investors take stock of yesterday's historic "no" vote in the Greek referendum on the most recent -- but now expired -- set of terms from its creditors, one thing is certain: Things ought never to have reached this stage between Greece and its European "partners," and both sides are to blame for the fiasco. Still, they must now accept the reality of the situation and press on, for a Greek exit from the euro is not, even now, a foregone conclusion -- although the referendum result has certainly raised its probability by complicating the relationship between the two sides. 

Greek Prime Minister Alexis Tsipras has been emboldened by the "no" he campaigned for and believes it is a source of democratic legitimacy (which does not, however, trump the legitimate concerns of European taxpayers footing the bill for Greece's bailouts), while eurozone officials have framed it as a Greek repudiation of the country's commitment to the European project (instead of what it is -- a protest against more austerity). 

Is Mr. Tsipras crazy like a fox, or just plain crazy? His brinkmanship suggests some combination of recklessness and rank amateurism, but he did extend an olive branch by asking for and obtaining today the resignation of his abrasive finance minister, Yanis Varoufakis, who his European peers considered to be an obstacle to fruitful negotiations. 

With Greek banks closed and running low on cash, the noose is tightening around the neck of the Greek economy. The Greek financial system is on life support at the pleasure of the European Central Bank (ECB), which is providing emergency financing, but that support will be in jeopardy if Greece defaults on a 3.5 billion-euro bond owed to the ECB on July 20. Without further aid, that default is unavoidable (Greece defaulted on a 1.5 billion euro payment to the IMF last week.) 

What does all this brouhaha mean for investors in the U.S. market? In terms of business values, the impact is roughly zero; however, it's quite possible that the situation will spark stock price volatility between now and July 20 and beyond, thereby creating opportunities for patient investors (even though investors appear unfazed today).   

Still, there is no point in behaving hastily: As former PIMCO CEO Mohamed El-Erian wrote yesterday, "Any buying opportunity will take time to develop given the high initial market valuations." Furthermore, I'd expect that opportunities are more likely to crop up in European stock markets -- value-oriented investors ought to keep an eye on high-quality European multinationals, such as Total SA (ADR) (TTE -0.32%) or Unilever N.V. (ADR) (UN). 

China's bear is loose 
Chinese authorities have thrown everything but the kitchen sink at the bear market that is unfolding, with mixed results on Monday, as the Shanghai Composite Index gained 2.4%, while its Shenzhen counterpart posted a loss of 2.7%. That puts those indexes down 27% and 33%, respectively, relative to the highs they achieved only last month. The volatility in this market is substantial, with the Shenzhen Composite Index varying in a 12 percentage point range today. 

Has the regime managed to staunch the bleeding, or are greater losses in store? The always interesting George Magnus, a senior advisor at UBS and an associate at Oxford University's China Centre, doesn't think so. In an article published yesterday on the Financial Times website, he writes:

In a market that is about speculative euphoria, and confidence in the government's ability to stand behind it, it is hard to know when to call time. But when one withers, the other will follow. When that happens, the Chinese bear market will probably resonate louder than it has done to date.

And back in the U.S. ...
Speaking of official organizations that have thrown everything but the kitchen sink at a crisis, the Federal Reserve releases the minutes of its last monetary policy meeting on Wednesday, and two voting members of the Federal Open Market Committee are making speeches this week, including Fed chief Janet Yellen. It will be interesting to see whether Yellen comments on international events as they relate to the United States.