Well, we didn’t see that coming, neither did the Institutions (nee Troika), nor the markets. Greece has pulled the negotiations plug at the last minute and put the deal to a national referendum (5 July) AFTER the deadline for payment (1 July). The Eurogroup has said there will be no bailout extension, the ECB has frozen the ELA and the Greek banks are to be closed for the week. That leaves a high degree of uncertainty with regards to payments, Greek bank solvency and indeed the future of the EUR; not just a Greek exit from the Euro. This will not be solved easily or soon.

FX markets opened sharply lower in EUR, higher in JPY but are relatively steady for now. We believe that a stronger risk off theme may develop through the day. Watch for official measures to ease risk concerns and the Fed has reminded markets of their FX swap arrangement with the ECB. This is to eased demand for USD in periods of stress; expect similar statements from other central banks.

Where does that leave us? Monday is likely to be an uncertain one for financial markets, trying to make head or tail of a situation that is unprecedented. There will be a mass of headlines and speculation. When that happens, there is usually a run to safety. Until now most had assumed there would be a last minute deal; that is no longer possible.

The problem is that there is uncertainty about the solvency of the Greek banks. There were withdrawals of about E1bn on Saturday, and ATMs are being rapidly re-filled. The ECB had provided Emergency Liquidity Assistance (ELA) and there was around 1.5-2bn left on Friday. The question is- if there is no extension nor agreement with the Institutions, then will the ECB continue to provide ELA? The ECB and the Eurogroup has noted that they will ensure the stability of the Euro area (not Greece per se).

It is expected that the ECB will provide assistance, but that may come with additional haircuts and be reduced form the levels there had been seen. As of Monday morning (Sydney) the ECB appears to have frozen the ELA assistance at June 26 levels; that has required a closure of the banks and equity market for week. ATMs are to re-open Tuesday with a daily limit of E60 per day. Capital controls are to be announced later today.

Note that there are additional payments due in the coming weeks, with a large E3.5bn to the ECB on July 20th, and there have already been delays of payments to Greek pensioners. This might broaden and there is likely to be stress within Greece,t just to external creditors.

Risk aversion. This is not like before. We have had a slow bank jog in Greece and most thought that there would be an agreement eventually, at the last minute. That is no longer true. We’ve been using the term ‘crisis’ loosely for some time now but really, it wasn’t. Now is crunch time. And Tspiras has inflicted the first blow, assuming all sides would cave in: they no longer can. That likely means that the inverse relationship between European equities and EUR breaks down. This is bad for both in the short term. The speculative market, and likely others, had reduced their EUR shorts from the extreme in April to around half that. There is scope for a broad section of the market to short the EUR through this, than just those exposed to the equity market (and their hedges).

For the Southern Hemisphere, and the China proxy currencies of AUD and NZD, the moves to ease policy from the PBoC may also have a negative connotation. The PBoC cut interest rates 25bp and eased the RRR for a section of banks on Saturday. This was expected, but likely came in response to the ongoing, and relentless, decline in the equity market. The Shanghai market closed down 7.4% on Friday. The declines appear to be coming from the tightening of margin requirements after ramping up aggressively over the year. For a sense of scale, there were over 1 million NEW investors entering the market each week – that eased to less than 1 million last week. In addition, yields had been rising, some suggestions that this is associated with funds tied up in IPOs occurring before the end of the month. So the easing of rates is not likely to be taken as a positive step, but more of a negative this time around. It is a retroactive looking easing, perhaps rather than a pro-active easing. That tends to put negative pressure on the AUD and NZD.

Coming Up

We’ll be watching the Greek headlines today, there is no local data. In the US we get house prices and Case Schiller house prices. Watch the Chinese equity markets as well, with many expecting a rebound. If this is not forthcoming there is likely to be more downward pressure on AUD.

Overnight

On global stock markets, the S&P 500 was +0.00%. Bond markets saw US 10-years +6.38bp to 2.47%. On commodity markets, Brent crude oil +0.09% to $63.26, gold+0.1% to $1,173, iron ore -0.3% to $62.01. AUD is at 0.7638 and the range was 0.7741 to 0.7662.

For full analysis, download report:

• Markets Today: 29 June n2015 (PDF, 269KB)

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