The initial reaction from the market to Greece’s decision to reject a compromise with its creditors is bad, but not horrific, at least not yet. Equity futures are down across the board and the euro has been hammered. EURUSD was down over 1.2% at one stage, before recovering some of this ground later in the morning.
It seems the market may be preparing for a possible repeat of last Monday’s price action after the referendum was announced, where risk assets were initially hit hard before recovering some of their lost ground. This kind of knee-jerk reaction to the initial sell-off is dangerous in our opinion, given how far into uncharged territory Greece is and the heightened systemic risk in China’s leveraged stock markets, despite the moves by Beaning over the weekend to encourage bulls and calm bears – it froze new share listings and setup a fund to stabilise markets.
So, what’s next?
The definite and loud ‘no’ from Greece means one of two things; either its international creditors fold or Greece goes bankrupt. It’s too early to tell exactly what is going to happen, but it seems more likely that Greece will break away from the eurozone after the No camp won over 60% of the vote. European leaders are to meet on July 8 and the ECB has to decide what to do with Greece’s banks, they’re running dangerously low on liquidity and run the risk of running dry without more support; capital controls are likely to increase this week unless more emergency funding can be found.
Market reaction:
There’s a lot of uncertainty in the market and only time will tell how this will play out. However, it’s hard to see how risk assets can rally for an extended period in this kind of toxic environment, at least in the near-term. We need more clarity on how this is going to play out; the real test will come when European markets come online latter today/tonight. The battle zone is Europe and this is likely where the most casualties will be. Although, the reaction from China’s stock markets may also help to decide overall investor sentiment – will the moves by Beijing over the weekend be enough to cage equity bears given the highlighted risk of a Grexit?
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