Will the Greece crisis cause a problem for financial markets?

Although Greece is at a critical stage, and it is merely hanging onto Eurozone membership by a thread, the financial markets have been remarkably calm. The problems have been fairly localised to domestic Greek markets after the announcements that Greek banks were to close and capital controls would be imposed.

Rather than tank, EUR/USD has managed to keep its head above water and even though it fell initially on the news that the banks would be closed, a dip below 1.10 was not a stepping stone to another lurch lower for the single currency, at least it was not in the short term. Sentiment towards European stock markets was more fragile, but overall the reaction was fairly limited and did not seem to reflect panic about the future of Greece, or the future of the Eurozone.

Although stocks seemed to reflect greater concerns about Greece compared to the euro, the markets have been in reactionary mode: one moment they will be upbeat about a headline from Athens that Greece will request another bailout, the next they will be downcast because German Chancellor Merkel said that no bailout would be offered if Greece insists on holding a referendum on bailout terms.

Headline risk is a key concern for investors right now, especially as the situation in Greece is so complex. How are traders meant to plan for a Grexit when they have no idea how long this would take or what it would actually entail? This partly explains why investors have been sitting on the side-lines and we haven’t seen a mass exodus from the EUR or from European stocks. Although markets usually sell-off on the back of uncertainty, events in Greece have confused investors, which means that uncertainty could be keeping people on the side-lines rather than actively trading Greek events.

If Greece was to actually exit the Eurozone then we could see volatility rise in financial markets, but overall, we tend to think that Greece could remain in the background over the coming weeks as markets focus on other less confusing events.

One such event is the Federal Reserve. Over the summer months the focus is likely to shift away from Athens and towards the US, as economic data is assessed to see if the US economy will be strong enough for the Federal Reserve to hike interest rates in September.

A US interest rate rise could dominate market sentiment over the next few months as it could reignite the dollar rally that has struggled to gain fresh momentum in recent months. A rising dollar has major implications for stock markets, oil and precious metals and could be a much more important driver of markets than Greece in the long term.

Overall, we think that a US interest rate rise could have a larger influence over the euro than the Greek crisis as the market watches the Fed’s every move in the coming weeks. Thus, although the market and the media are watching Greece intently right now, this could be short-lived and we think that events in America will be much more important over the coming months.