Markets Await Outcome Of Greek Referendum

• Greece holds a referendum on Sunday, with polls suggesting a close result
• UK Chancellor’s Budget statement could revise down net borrowing for 2015/16
• FOMC minutes and a slew of Fed speakers are due

All eyes will be on Sunday’s Greek referendum. It has been a momentous week in Europe, with Greece missing its payment to the IMF and its bailout also expiring at the end of June. Greek PM Tsipras unexpectedly broke off negotiations with creditors and called a referendum for Sunday, urging the public to vote ‘no’ to the proposals, presumably in the hope of securing a better deal ahead of the vote. The creditors, however, have refused to negotiate further until after Sunday. In the meantime, the ECB has frozen emergency liquidity assistance (ELA) to the country’s banks at €89bn, resulting in capital controls. As the referendum will ask the public whether to accept or reject a highly technical document, it is not clear whether most people will understand what they are voting for. There is also no way of knowing with certainty what the consequences of a ‘yes’ or a ‘no’ will be. Mr Tsipras insists that a ‘no’ vote will improve the government’s negotiating position after the referendum. The creditors, however, have indicated that it is a simple yes/no vote on euro membership. 


Polls suggest that the vote could be close. The vote takes place between 5am and 5pm (BST) and some results are expected later on Sunday. A ‘yes’ vote would likely result in a ‘risk-on’ market response, including tighter peripheral bond spreads and a relief rally in the euro. Prospects of a deal with the creditors could also result in the ECB raising the ELA limit. It would, however, also lead to questions about the viability of the Greek government, including Mr Tsipras’s tenure. A change in the composition of the government could still leave him in charge, but a unity government or one formed by other parties is also possible. A ‘no’ vote, however, could result in a much more significant ‘risk-off’ market reaction, since it is uncertain how the creditors will react and ultimately whether Greece’s continued euro membership can be salvaged. Without prospects of a deal and therefore adequate collateral, there is a risk that the ECB will reconsider its ELA, resulting in more stringent capital controls and the possibility of bank recapitalisation. This may force Greece’s government back to the negotiating table, but the risks of Grexit would be significant.


UK Chancellor Osborne delivers his post-election Budget statement on Wednesday. The key issue is whether the fiscal consolidation in the next few years is re-profiled. The budget deficit for the current financial year looks likely to be revised lower than the £75bn forecast in the March Budget, thanks to asset sales and strong tax receipts. This could mean the scale of fiscal tightening is reduced in 2016/7 and 2017/8, which had constituted a potential headwind for growth. Alternatively, the Chancellor could conceivably target an earlier return to budget surplus. He is also expected to provide more details on his Mansion House speech announcement to run fiscal surpluses in ‘normal times’, implying a tighter fiscal stance in the longer term. 


The Bank of England’s monetary policy announcement (Thu) is expected to show no change, which will result in a ‘standard’ statement being issued. From next month, however, the policy announcement, minutes and the quarterly Inflation Report will be released simultaneously, which could result in some market volatility. UK industrial production (Tue), construction output and trade data (both Fri) are the main data releases next week, with markets looking for them to corroborate survey evidence of stronger Q2 GDP. In the US, the FOMC minutes (Wed) and a slew of Fed speakers, including Chair Yellen on Friday, will provide insights into the likelihood of policy tightening in September. US non-manufacturing ISM (Mon) and trade data (Tue) are also due. In Australia, the RBA (Tue) is expected to leave rates unchanged at 2%. Data wise in Europe, a small decline in German factory orders (Mon) and broadly flat industrial output (Tue) are expected.