Greece votes against austerity

Confusion and uncertainty seems to have crept through traders’ minds in Asia today.

Source: Bloomberg

The fear of the unknown has seen a number of traders unwinding long positions in European equity indices, with US futures also being sold. This has not been mere speculation, but also traders using futures markets to hedge portfolio risk.

Various polls have been predicting a Syriza victory in the Greek election for some time. However, the margin of victory was above expectations and the subsequent coalition with the Independent Greeks may have just complicated matters.

Still, if the trend through Europe is to reject austerity, reduce the shackles of debt and look for more pro-growth measures, then Greece has set a strong precedent and parties like the newly-formed Podemos in Spain will be keen to see if this trend can spill over as they approach national elections later in the year.

EUR/USD finds buyers at $1.1100

EUR/USD initially saw a continuation of its recent momentum in early trade, although liquidity was even harder to come by as many in Australia were off for the Australia Day holiday. The low print of the day was $1.1098 with sizeable options barriers supporting the figure. It has to be said that we have seen huge falls in EUR/USD and the crosses of late, and as such the EUR is at risk of short-covering moves, with the techincals suggesting that these pairs are oversold.

EUR/GBP has now fallen six weeks in a row and has never seen seven consecutive falls since the inception of the euro in 1999. Still, with a painful period likely for markets as they digest and obsess over the new Greek government’s negotiations with Eurozone officials, it’s hard to see too much positivity toward the single currency.

We have already heard from Alexis Tsipras today, declaring an end to the Greek bailout agreements.

It’s worth highlighting that the current bailout programs expire next month and Greece could in theory run out of funds by July. I’d imagine we’ll be seeing much more stress in Greek bond yields, with credit-default swap spreads moving closer to that of Ukraine.

Looking at markets today there is certainly a bias to be risk averse, with Dow and S&P 500 futures falling 156 and 19 points (or 0.9%) respectively at one stage. Some buying has come into these markets, in-line with a move off the $1.1100 level in EUR/USD. European opening calls have followed suit, with our low opening call on the DAX at 10,491, for example. It seems the Eurostoxx index is going to hit a wall of uncertainty on the open after a 23% rally since mid-October.

European markets likely to be met with strong selling

As suggested, our European equity market opening calls have been lower, but better buying has been seen as the day rolled on. It’s worth highlighting that clients hold a sizeable net short bias in general, with 79% of all open positions on the German DAX held short and looking for a pullback. There is a similar picture for the FTSE, while there is a strong bullish bias on gold and silver.

It’s hard to see the micro picture having much of an effect today, despite Microsoft and others detailing earnings. I still feel that pullbacks in European markets will present good buying opportunities, while EUR/USD rallies will be short-lived. I am, however, keen to watch implied options volatility.

It’ll be interesting to see how US traders act on the Greek news and whether the market can build on Fridays down move, or will show little interest in the unfolding Greek drama. Watch the copper market as well, with the metal down around 1%, while US treasuries continue to find buyers. It’s hard to believe that one can lend to the US Treasury for 30 years and be compensated with a 2.33% yield! This is actually below consensus expectations for year-end calls on the 10-year treasury.

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