Greece one step closer to the exit door

We’re seeing a flight for safety in financial markets at the start of the week as investors respond to the actions of the Greek government over the weekend that has set in motion a series of events that may ultimately lead to Greece exiting the eurozone.

The euro experienced heavy selling on the open, as traders sought the safety of the yen, Swiss franc and Gold to protect against the negative fallout from events in Greece over the weekend. The worst case scenario that was laid out on Friday is effectively in motion as we approach the European market open on Monday.

A decision by Greece Prime Minister Alexis Tsipras to put the deal on offer by the institutions to a referendum on 5 July for the people to decide has moved the country one step closer to the exit door. It also forced the hand of the European Central Bank to freeze its emergency liquidity assistance to Greece leaving them with little choice but to impose capital controls – capping daily withdrawals at €60 – and close the banks.

The rejection of the deal by Tsipras and decision to put it to a referendum next weekend also means the country will default on its debt repayment to the IMF tomorrow which will create further turmoil in the markets at the start of the week. Next week’s referendum is effectively being viewed as a vote on eurozone membership as a rejection of the bailout will likely be the next move on the path to a “Grexit”.

The referendum is likely to weigh heavily on investor sentiment throughout the week, particularly towards the end as the all-important vote takes place at a time when the markets are once again closed. The euro has held up rather well under the circumstances, down only around 1.35% having plummeted on the open. Stock markets are not expected to be as resilient, with indices currently on course to open more than 4% lower in much of Europe. Bond markets are also likely to be in for a bumpy ride today as we find out just how confident investors really are that the periphery is shielded against the contagion risk that almost brought them down a few years ago.

It wasn’t just an eventful weekend for Europe, as the People’s Bank of China stepped in and cut interest rates by 25 basis points and the reserve requirement ratio to select lenders. The move was clearly a desperate attempt to shore up equity markets that have plummeted more than 22% in a little over two weeks, including a 7.4% decline on Friday alone. The move initially appeared to have worked, with the Shanghai Composite having opened higher but that didn’t last long and the index is now off around 5.5% having broken below the psychologically important 4,000 level. The way things are going we may see Friday’s decline beaten today.

Just to cap it all off, this week is jobs report week in the US and the numbers will be released on Thursday as US markets are closed Friday for Independence Day. The week has got off to a chaotic start and it is only likely to continue which should create some volatile market conditions.