Bears feast on the euro and equities as the risk of a Grexit greatly increases

It has been a wild morning in Asia for asset markets throughout the world. Over the weekend, Greece failed to reach a deal with its creditors as Athens announced plans for a referendum on the debt deal. Even on Friday the market had faith that Greece and its creditors would reach a deal over the weekend to secure another bailout, and the surprise decision to hold a snap referendum greatly increases the risk that the Greece will exit the eurozone. In response to Athens the ECB froze the amount of emergency capital supplied to keep Greek banks afloat, forcing Athens to impose capital controls and close its banks. The ECB didn’t completely cut-off emergency loans but it did impose a EUR89bn limit, meaning that Greek banks don’t have the capital to service all withdrawals but they also won’t go bust, at least not yet.

The response from the market has been brutal as investors run for safety, sending the euro into a tailspin. Equities markets throughout the world have also felt the full force of the global search for safe haven assets, with the ASX 200 falling over 1.8% in morning trade. The Nikkei 225 is even worse off, falling around 2.2% at the open. Equity futures are also painting a very grim picture from markets in Europe.

Interestingly, the aussie and kiwi have been able to escape relatively unscathed, largely due to the PBoC’s decision to cut interest rates to a historic low and reduce the amount of capital that banks are required to hold in reserve. The PBoC lobbed 25 basis points off its one-year lending rate, it is its fourth such cut since November 2014, and cut its RRR by 50 basis points. It is the first time the central bank has loosened both of China’s main policy rates since the depths of the global financial crisis.

The policy loosening in China is likely in response to a broad sell-off in Chinese equities over the last two weeks, with the Shanghai and Shenzhen Composite markets falling around 7.4% and 7.9% respectively on Friday. Beijing clearly wants to restore confidence in its equity markets and in China’s economy as a whole.

However, this will have to be weighed against the negative sentiment flooding equity markets throughout the world after the inability of Athens and its creditors to reach a deal over the weekend – keep in mind Greece has a EUR1.5bn loan repayment to the IMF on Tuesday. A failure to pay the IMF the loan is unlikely to be considered by rating agencies as a default, but the ailing nation owes EUR3.5bn to ECB on July 20; a failure to pay this would almost certainly end any last ditch hopes to secure a new bailout and avoid leaving the eurozone.

Has EURUSD been fatally wounded?

EURUSD has been mauled by bears this morning but the pair has managed to poke back above 1.1000. It’s going to be a very interesting week for the common currency as the market continues to address the possibly of a Grexit and the potential ramifications this would have for the broader eurozone. Our bias is lower given the obvious fundamental risks to the currency, but a lot depends on how European markets react to the Greek news tonight.