Greferendum – the bear case is here

This weekend will be remembered as one of the biggest (if not the biggest) flash points since Mario Draghi’s ‘whatever it takes’ - markets clearly were not ready for will transpire today.

Source: Bloomberg

Greferendum is now upon us. Prime Minister Alexis Tsipras has shunned negotiations and thrown himself to the people and the rule of democracy – a referendum is now to be had.

Bank holidays and frozen funds – The state of play

The SYRIZA party has announced a 5 July referendum for the Greek people to ‘accept’ the terms being put forward by its creditors.

The SYRIZA party intends to vote ‘NO’. Even if a ‘YES’ vote comes to pass, it is very hard to see how that would be implemented and whether the country would actually implement the program in a manner that would work.

In a poll done last night 67% of those surveyed said they would vote ‘YES’. Greece clearly wants to remain in the Eurozone, but what that will look like is very unclear.

Greece has moved to avert complete financial collapse by imposing a bank holiday for Monday - a holiday that is unlikely to be a single day.

It has proposed a €60 withdrawal cap on ATMs to stop a capital run on.

The ECB is going to work very closely with the Bank of Greece to safeguard financial stability and maintain the ELA at Friday’s level.

The Greek government has requested that the current program be extended to the 5 July referendum. This has been refused.

Default is here

Negotiations are over. Greece will default on its €1.7 billion debt repayment come the close of Tuesday.

The IMF will have no other option considering the events that have transpired over the weekend. Under the IMF’s mandate they can say ‘we see a deal and therefore we don’t see a default’ if they know a deal is coming. However, the 5 July referendum is a) too far out on a timeline basis and b) will do little to actually stave off default. 

The bigger issue is what are the Greek people voting on? No clear or comprehensive package has been tabled. So, again, if the ‘YES’ vote transpired, Brussels would be scratching its head as to what the mandate would be.

Next problem – the 20 July ECB debt repayment is due – no mandate or clause will save Greece here. Missing this payment is an official default and a hard line cut off.

Over the weekend, IG’s out-of-hours DAX fell 522 points (-5.2%) and closed down 3.9%. The CAC was down 4.8% closing down a similar amount to the DAX. 

This is now a rolling risk event – mitigation is all that can be done.

Don’t forget the PBoC

China is flirting with a technical bear market. Friday saw a mass sell off involving a 7.87% collapse of the CSI, a 7.4% collapse for the Shanghai composite and the A50, and ChiNext closed down 8.4%. This has forced a reaction from the PBoC.

Fourth cut in eight months: The reserve requirement ratio (RRR) was cut by 50 basis points (bps) for targeted banks – the support is targeted at the agricultural sector and/or small and micro enterprises. For financial companies, the RRR has been cut by 300 bps.

The PBoC cut the lending and deposit rate by 25bps effective from yesterday to 4.85% and 2% respectively.

The estimated monies release here is RMB650 billion (approximately US$106.5 billion) – no doubt this will raise growth estimates and create support for industrial production and manufacturing.

The interesting change here, though, is the PBoC is reacting to spot fires rather than accommodating the growth as it could in the past. This might be a short-term positive for markets. However, the longer-term mandate of the PBoC has changed to fiscal and monetary reform. This is not what it wants to be doing – it too is in a financial bind as to how to proceed.


What’s spiking my interest

  • Non-farm payrolls on Thursday
  • End of financial year on Tuesday
  • European employment reads on Tuesday
  • Glenn Stevens is speaking on Tuesday – he may have to change his speech now
  • European CPI tomorrow as well
  • China’s official manufacturing data on Wednesday
  • US manufacturing Thursday


Ahead of the Australian open

Futures closed up six points on Saturday – that is clearly stale. The US futures open at 8am but the better indicator, S&P futures, were down 1.78% on the open. Gold futures have spiked.

China’s stimulus measures may stem a full bleed – but it will be a sea of red this morning, lunch and afternoon. Risk mitigation will be everything!

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