Focus is on Fed's next move amid Europe, Asia crises

IT FEELS like the week Lehman Brothers died. This time, it's Greece whose financial fate hangs in the balance in weekend talks, and a similar panic threatens to wash through markets if the nation crashes out of the eurozone.

Markets awoke last week to a clarion "oxy" ("no") from the Greek electorate, a message that one strategist said was akin to giving "the finger" to the eurozone.

Then there was the massive government intervention in the Chinese stock market - halting thousands of stocks and establishing stock-buying sovereign funds to pump up the market. If Beijing's sledgehammer approach was intended to inspire confidence, it initially did the exact opposite. Analysts said the moves smacked of desperation and evoked the last time a government leapt to the defence of a stock market inflated on borrowed money - the Wall Street crash of 1929.

After wavering on Monday and Tuesday, the Shanghai Composite succumbed, with another 5.9 per cent retreat on Wednesday.

In the US, there was a rapid succession of eerie technological failures that seemed much more than coincidence. First, United Airlines grounded its entire US fleet because of a computer glitch. Shortly thereafter, the Wall Street Journal's website went down. And then, the real harbinger of doom struck, as trading was halted on the New York Stock Exchange (NYSE) and its electronic affiliate for four hours.

A couple of decades ago, the NYSE was the US stock market and most investors still think of the institution as a temple of capitalism. In the electronic stock-trading age, however, stocks that are technically listed on the NYSE also trade on the Nasdaq and on dozens of other electronic exchanges and anonymous "dark pools".

"We can still trade these electronically," said Joe Kinahan, chief derivatives strategist at TD Ameritrade, and a veteran of several market shocks in the Chicago options-trading pit. This one, he said, was a breeze.

Still, the Chinese selloff spilled over to the US stock market. Before optimism about a Greek deal welled up on Thursday, the Dow Jones Industrial Average was closer to its 2015 low than it was to the May peak.

Eric Marshall, portfolio manager for mutual-fund firm Hodges Capital in Dallas, said the US stock market was overdue for a break. It's been more than two years since the last 10 per cent correction, he noted, something which suggests that complacency and stock values are out of kilter with earnings prospects.

Unrealistic valuations are at the heart of China's stock crisis. Even after last week's shakeout, many of the smaller Chinese stocks are worth hundreds of times their per-share earnings. The prices of such stocks - and American counterparts in speculative niches such as biotechnology - will have to come down further at some stage. As ever in the stock market, timing is the major unknown.

In the eurozone, complacency is also a danger. Markets rose late last week because Greek Prime Minister Alexis Tsipras appeared to have pulled off a curious gambit. After saving face at home by thumbing his nose at German Chancellor Angela Merkel and the rest of Europe with the surprise referendum, he produced a proposal almost identical to that the creditors had offered all along.

Mrs Merkel was not amused; over the weekend, German and Finnish delegations to Europe said Greece could not be trusted. "Grexit" is still a possibility as Germany has a decisive vote in the European agencies that must approve the Greek proposal. One brokerage warned that the market has consistently underestimated the dangers of a Greek exit and of the possible contagion in markets.

Another money manager said he wouldn't let Greece affect his investment decisions one way or the other. "There are very few US stocks I would buy or sell today based on what is going on in Greece," said Mr Marshall of Hodges Capital. "If you had told me: 'This is what's going to happen over the next six weeks in Greece', I don't know that would change my outlook a whole lot."

Such was the distress over China, Greece and the NYSE's glitch that investors all but forgot about Alcoa's relatively optimistic opening to earnings season. Oil futures had their biggest drop in months, partly because it looked as if a deal might be struck between Iran and the West in Vienna - but nobody noticed that either.

This Tuesday's retail sales report and earnings from major banks could receive more attention this week. Traders will continue to watch international crises but they will do so through the prism of the US central bank. The big question now is whether the Federal Reserve considers the chaos in Asia and Europe cause to postpone rate hikes to 2016. Fed chair Janet Yellen may hint at the answer midweek.

"If we have Chinese markets calm and Greece is calm in essence you have a purer view of the US, in terms of data in terms of earning, and most important Janet Yellen's testimony in Congress," said Quincy Krosby, market strategist at Prudential Financial.