Cautious stance ahead of Greek talks with its creditors

The Day So Far

The lack of panic seen in equities yesterday following the Greek ‘no’ vote at the weekend came as a surprise to many given the skittishness of markets in the run-up to it last week. This is for two major reasons: firstly, hope; hope that somehow, against all the odds, a deal of some sort can be reached between Greece and the creditors at the Euro group meeting later today after the markets close. The latest Greek proposal, which is unlikely to differ much in tone or content after the implicit vote of confidence Tsipras & co received at the weekend, is expected to be given short shrift at the meeting as differences remain between the hard-line European countries and those who prefer a softer stance towards the ‘sick man of Europe’. However, the way equities are trading suggest that there is hope a deal can be reached, at least before the next major bill comes due (Eur 3.5bn to the ECB on 20th July). Secondly, Tsipras has hinted at a more conciliatory stance post –referendum than originally feared, removing the controversial Varoufakis as Finance Minister, whose maverick style to negotiations was proving very unpopular with the creditors. Varoufakis will, however, remain a part of the negotiating team.

Elsewhere, the carnage in Chinese equities continued, with the regulators and Chinese authorities seemingly unable to stop the dramatic slide in the Shanghai Composite, closing down another 1.26%. The Australian Dollar has also made a sympathy move lower, falling to a six year low versus the USD. Copper similarly dragged lower, hitting five month lows. Elsewhere in the commodity space, crude fell 6% as the dollar strengthened versus major currencies.

The Afternoon View

We are sceptical of a prospect for a deal or indeed, for real progress to be made at tonight’s showdown. The creditors and the Greeks will meet for the first time since the referendum, and the Greeks are unlikely to want to compromise following the ‘Oxi’ vote while the Eurogroup is becoming increasingly exasperated with the Greeks’ seeming intransience. Therefore, we maintain our cautious stance towards equities, with disappointment today likely to trigger another leg lower in the S&P, possibly to re-test the yearly lows below the 2000 level. The resumption of the dollar strength has been a trade we’ve been calling for the past couple of weeks and see no reason to change our bias now, so we maintain our bearish view on the euro and crude.