July 6, 2015

Markets Today: 61% say No

Ahead of Sunday’s referendum, that is now in process of delivering a decisive ‘No’ vote (to the terms and conditions under which Greece’s creditors would have extended the now-expired second bailout).

Ahead of Sunday’s referendum, that is now in process of delivering a decisive ‘No’ vote (to the terms and conditions under which Greece’s creditors would have extended the now-expired second bailout) German Finance Minister Wolfgang Schaeuble had been reported by German media as telling fellow party members that a No does not mean Grexit.

This was not a view being publicly echoed by many other protagonists in this long running Greek saga. As the FTs Peter Spiegel, who has provided some of the most insightful coverage of the crisis in recent weeks, was noting on Saturday, luminaries ranging from French President Francoise Hollande, Italian PM Matteo Renzi to EC President Jean-Claude Juncker, have made clear they would consider a No ‘a breach within Europe and a choice to leave the euro.

Just now, German economy minister Gabriel is being reported as saying that Greek PM Tsipras ‘has ripped down the last bridge on which a compromise with Europe could have been built’ and that Tsipras is leading the Greek people ‘down the path of hopelessness’. Yet others, such as the Luxembourg PM,  are expressing confidence in a solution being found (which presumably keeps Greece in the euro).

The ‘no’ vote (61% at last count) is the worst possible outcome from an ‘uncertainty’ perspective. It is hard to challenge the appropriateness of EUR/USD continuing to trade sub-1.10, AUD south of 0.75 (and AUD/JPY sub-¥92) on sharply higher market risk aversion. This after the AUD/USD had already traded to a new cycle low of 0.7510 on Friday, at the end of a week that saw iron ore prices shed more than 10% and the Chinese stock market more than 12%.  We are sceptical that Saturday’s announcement of an RMB120bn support fund for equities will do more than temporarily stop the rot.

‘Grexit’ risk has clearly risen sharply, and is now the singularly most likely scenario following the referendum.  That said, other scenarios, under which a new deal is eventually agreed, following a protracted period of bank closures/uncertainty/negotiations (and possible fall of the government once it becomes clear Mr Tsipras has sold its citizens a pup) can still sum to a probability of close to 50%.

Of one thing we can be sure: the ‘moral hazard’ risks arising from immediately granting Greece a soft deal with substantial debt relief to a Tsipras/Varoufakis- led government under which there is no confidence that agreed-to reforms will be adhered to, makes this a less likely scenario than Grexit.  This is likely to be the message that emanates from the EU summit that Mrs Merkel and Mr Hollande have just called to take place on Tuesday.

(Eventual) deal or no deal, it is hard to see reason why investors should be taking a ‘Grexit is good’ (for the rest of the euro-area) view of developments just yet, even if that is ultimately the case. Equity/credit market weakness and  safe- haven support for core government bond markets (US and Germany) is the easier call than that the Euro necessarily heads much further south (too many people are still bearing the scars from selling the euro during prior periods of existential angst regarding the euro).  We nevertheless expect to see the euro heading lower in the short term. A move back to the 1.05 area lows from March and April is not unreasonable. One limiting factor here will be the view that the upcoming period of protracted uncertainty in Europe keeps Fed ‘lift-off’ at bay.

One immediate question for markets is whether the ECB acquiesces to the inevitable request for an increase in Emergency Liquidity Assistance (ELA) funding, amid indications that the withdrawals that have been permitted since banks were closed a week ago means the current ELA limit is almost certainly insufficient to keep banks technically solvent.

A refusal by the ECB to increase ELA limits (highly likely) brings with it the prospect of depositor haircuts (as well as keeping banks shut of course). This may be when voters start to realise that what they think they’ve just voted for is not what is going to be delivered, and social chaos ensues.

Coming Up

Searching for influences on markets this week beyond the fallout from the Greece referendum, it’s hard to look past a Friday night speech from Fed chair Janet Yellen in Cleveland and on the US Economic Outlook. This will be preceded on Wednesday by the minutes of the June 16-17 FOMC meeting. There’s a fair few other FOMC members speaking during the week.  With last Thursday’s payrolls report having failed to offer the smoking gun that – ex-Greece – might have all but locked in a September Fed ‘lift-off’, incoming data will continued to be as closely parsed.  In a low-key weak for data, tonight’s’ non-manufacturing ISM and Tuesday’s JOLTS (job openings) report look like the highlights.

In Australia, it’s the statement following what should be a no-change RBA decision on Tuesday, and Thursday’s labour market report, that stand proud on the calendar. Today, it’s just ANZ job ads and the TD Securities/MI monthly inflation gauge.


On global stock markets, US bonds and equity markets were closed, as were oil futures.  Gold was +0.4% to $1,168, iron ore -0.7% to $55.26. AUD is at 0.7459 and the range since Friday’s local close has been 0.7452 to 0.7559.

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