Greece fallout - are fears overblown?

The argument for overblown fears over the fallout resulting from a Greek default and possibly an exit from the European Monetary Union (EMU) goes like this.

Source: Bloomberg

Greece is not a major economic power in the 28-member European Union (EU), coming in as the 13th largest economy in the regional bloc. Based on Nomura, international banks’ exposure to Greece had fallen 79% to USD 46 billion as of 2014 from USD 217 billion in 2009. International exposure to Greek debt was down 80% to EUR 42.7 billion in 2014 from EUR 219 billion in 2009.

So, it appears that a Greek debt meltdown may not be catastrophic for the EU, but why did global equities react in such an ostentatious manner? Is it an excessive overreaction to headline news coming out of Greece?

To a large extent, the worry lies in the possibility that the credibility of the EU may have suffered substantially, should Greece be allowed to go into cardiac arrest. Furthermore, a Grexit may set the stage (and precedent) for other vulnerable EU countries such as Spain and Portugal to consider whether staying in EU is right for them.

Nonetheless, the increasing likelihood that Greece may not see an orderly process to concluding a bailout deal, if any, was the catalyst for the risk-off sentiment. Adding fuel to fire was ECB President Draghi’s remarks: “While all actors have to go the extra mile, the ball lies firmly with the Greek government”. The worst case scenario could include a combination of a default, imposition of capital controls and risks of the European Central Bank’s emergency lending facilities being withdrawn. The Germans are reportedly discussing about a plan B.

With both sides seemingly unwilling to back down from their stance, along with some grandstanding from Greek PM Tsipras, I don’t see this situation ends well. Volatility may well continue in the near term.

Meanwhile, disappointing US data on Monday will bring Tuesday’s housing starts numbers into focus ahead of the FOMC decision due in mid-week. The consensus is looking for a slight weakening in housing starts in May after a surge in April. It is anybody’s guess how the underwhelming May industrial production reading and June Empire manufacturing figures will impact the Fed’s outlook on the US economy come Wednesday. However, the market seems to think it has some impact. The dollar index fell through 95.0 following the softer data. Investors also bought into US treasuries while equities ended the overnight session lower.

For today, it may do some good to watch the minutes to the Tuesday 2 June RBA meeting and Bank of Japan (BOJ) Kuroda’s appearance (and possibly speech?) in Japan’s parliament. After Kuroda-san’s comment last Wednesday propped up the Yen, the market will be closely monitoring what he may say more about the JPY. Otherwise, there is nothing to get excited about in the data calendar for Asia on Tuesday.

Noble goes on a share buyback spree

The embattled commodity trader stepped up its share buyback on Monday, adding another 13 million shares to the 50 million purchased last week. The share price closed above SGD 0.7000. We continue to see the possibility of a dead cat bounce in Noble’s shares as underlying fundamentals remain unchanged. Technically, the 50-day moving average at SGD 0.828 should act as a formidable barrier for the counter. Near-term oscillators continue to point to the bearish side. 14-day RSI still capped below 50 while MACD line remained under the signal line and the zero line.




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