Be warned: Greece is not the only crisis in town

Should you fret or yawn over Greece? Negotiations appear to have foundered after the leftist Greek government tried to shift revenue-raising onto business taxation, but the Troika wanted a more serious cut in state spending. Ideologically they remain poles apart, and if the Troika is going to stick to its demands then at best it implies a "managed default" (oxymoron of the year?) and also breaking the Greek government. Even if a temporary deal can be exacted in the days ahead, a tortuous path remains to resolve the extent of debt write-off and for Greece to struggle from recession, if that is realistic without currency devaluation by leaving the euro.

Euro looks vulnerable

If Greece remains in the euro, then the ongoing saga will weaken the single currency such that Greece achieves better competitiveness for its key tourism industry (regarding non-euro visitors). Irreconcilable differences are being exposed between creditor nations in the European North and weaker nations in the south, putting the credibility of the euro construct in doubt.

The European Central Bank's monetary easing also fosters a weaker euro just as the US dollar rises on the back of perceived US economic recovery and growing expectation the Federal Reserve will raise interest rates - possibly in September and December. So banks and hedge funds are favouring a "short euro/long US dollar" trade which exacerbates each currency's opposing trend.

While this is welcome for Anglo Saxons heading to Europe for holiday, euro weakness also coincides with sterling strength - at just the time when Britain needs to improve its balance of payments and establish its economic recovery more widely than a dependency on consumer borrowing and imports. The implications are tricky for UK exporters and those operating from the Continent, raising the medium-term risk of profit warnings.

A canary in the coal mine?

A 24 June trading statement from speciality chemicals company Elementis is a rare profit warning, with most companies reporting "in line with expectations" - as well they should after years of monetary stimulus. But has wider global stimulus contributed to currency distortions and masked underlying realities? Elementis insists that "temporary" market dynamics in the second quarter of 2015 will impact its full-year results.

Understandably, the reduction in US oil drilling after last year's plunge in crude oil prices, has led to a 30% fall in demand for additives for this industry; otherwise coatings additives have made good progress in North and South America, but weaker demand in China has flattened Asia Pacific sales and European demand remains subdued. Altogether it means flat sales for coatings additives in the first half of 2015, which is nothing special for a cyclical business.

But a lengthy bull run in equities means a cyclical has ended up with a growth rating - the classic sign of a market top. Since 2012 and amid popular rotation into cyclicals, Elementis re-rated from 135p to a recent peak of 320p despite normalised pre-tax profit staying quite flat in an £80 million range. Prior to the 24 June update the stock traded on 18 times forward earnings, and even after plunging to 250p the price/earnings (P/E) may be around 20 times if talk of a 10% downgrade is realistic. Such a rating is only justified if the setbacks are, indeed, temporary.

Sales of additives to the personal care industry in Latin America have also been hit by local currency weakness, which looks unlikely to reverse as dollar strength exacerbates developing countries' debt issues (having borrowed via "cheap" dollar debt). The region implies flat first-half sales for this division, although better results elsewhere globally mean its full-year sales should be ahead (on a constant currency basis).

Elementis shows how exceptional monetary stimulus has numbed investors to the reality that factors would eventually emerge to compromise profit forecasts for cyclical firms. Investors have been dealt a classic "moment of truth" and it will be interesting to watch the extent other international-oriented firms/stocks may get caught similarly. At least valuation risks are greater in the US than the UK/Europe, but mind how stockmarkets can march to Wall Street's tune.

Euro crisis coincides with tenterhooks over US interest rate rises

While Greece is relatively insignificant in global - if not European - context, the chief problem is an existential crisis for the euro just when the US Federal Reserve is moving to raise interest rates. Not to take a dogmatic view that history repeats, just mind how it can chime.

Bank of America Merrill Lynch has pointed out to clients: "1937 is the only time in US history analogous to what the Fed will attempt to do later this year, and not only because short rates collapsed to zero between 1929-36 but because the Fed's balance sheet jumped from 5% to 20% of GDP to offset the Great Depression. Just like now. Briefly, the economy started to improve superficially, just like now, and as a result the Fed tightened in a series of three steps between August 1936 and May 1937. That caused three-month rates to jump from 0.1% to 0.7%, and the Fed exit strategy to fail as the money supply contracted, followed by a severe recession and 49% collapse in the Dow Jones."

US economic statistics continue mixed and the question remains whether the Fed's stimulus has had a genuine transmission effect, or will even a modest rise in interest rates clip the various means by which company managers have enhanced earnings - e.g. borrowing money cheaply for share buybacks, besides investment?

Complacency over "the search for yield"

For professional investors there has been huge career risk with being sceptical of central banks' boosting asset values: "join the party or lose your job". Fund managers account for the dominant flow of capital in modern markets. Even private investors with no career stake have faced substantial opportunity cost if staying mainly in cash after the traumas of 2008, and 2011 when stocks plunged again amid crises over US and European debt.

The bandwagon trade became "long equities" and to avoid problems in bond markets. But, according to cyclically-adjusted P/E ratios, equities are now richly priced with no scope for disappointments. In such a context, the Greek financial tragedy being played out - and what wider disruption it could trigger - becomes a more acute risk for instability.