A period of great uncertainty ahead

I am going to be the first to put my hand up and say I expected a much more aggressive reaction to a ‘no’ vote.

Source: Bloomberg

It has to be said that despite markets adopting a definitive risk-aversion feel, the mood has felt quite calm and there is little panic. It’s almost as if Asia-based traders are waiting for confirmation on trading moves from European traders before positioning short-term portfolios.

The falls in EUR/USD and EUR/JPY are even less aggressive than last Monday, which is interesting given the European Central Bank may look to increase its QE program at some stage. Perhaps the fact last week’s opening gaps were filled so quickly has a few traders concerned about limited downside and the potential for reversals to occur again. I personally would be selling rallies, notably in EUR/JPY and EUR/GBP.

In my opinion, the easier way of expressing or speculating on a worsening of sentiment around Greece is by either buying German bunds or through selling European equity indices. That way you don’t have the issues of investment managers unwinding portfolio FX hedges. Drilling down, the Spanish IBEX or Italian MIB would get the biggest reaction, especially given the Spanish election at the end of the year.

Amazingly, our opening calls for European equities are lower by between 2.4% and 3.5%. If you had said to me on Friday that we would see an emphatic ‘no’ vote and the DAX called to open 2.4% lower, I would have bitten my right arm off! What we saw this morning is along the lines of the worst possible scenario any macro strategist had in their playbooks, so it seems crazy that one-week EUR/USD volatility has only increased 5%, while the ASX 200 volatility is also only up a modest 5%.

The DAX looks especially interesting as it appears as though the 16 June lows of 10,797 will be breached on open and the trend, like in a number of other European markets, is now firmly down. What’s more, the Hang Seng and Chinese mainland have found good selling activity after the fresh measures imposed by Chinese authorities failed to trump the massive deleveraging underway in their equity markets.

I mentioned being surprised by the lack of panic in European assets, but the fact the CSI 300 has given up a 9% gain on the open is also amazing. There is no way the Chinese authorities would be happy with the reaction they have seen today.

Other key talking points which traders are focusing on:

  • Firstly, the real winner today was Alexis Tsipras, and of course those who are running short positions. Alexis Tsipras’s domestic position has strengthened, even more so as opposition leader Samaras stepped down this morning.
  • All eyes are now on whether there will actually be negotiations. Can the relationship between the Greeks and creditors be repaired? (especially given the sheer size of the rejection from the Greek people). Most of Tsipras’ rhetoric over last few days has been very confrontational and the relationship between all involved is badly damaged.
  • What conditions are needed for negotiations to even occur?
  • Merkel and Schaeuble have said a ‘no’ vote doesn’t mean a Grexit has to materialise. Juncker on the other hand was not as positive. But it’s hard to believe that a near-term agreement will be formed before 20 July with the current personnel involved (ECB €3.5 billion redemption).
  • Keep in mind that before negotiations can even start, the German parliament needs to give the German government approval before they can even engage with the Greeks!!!
  • Opinion polls within Greece have been significantly in favour of maintaining EMU membership. How can the no vote and EMU membership still be reconciled?
  • All eyes fall on the Greek banks. The ECB meet later today and could make a judgment on ongoing liquidity to Greek banks. A suspension of the ELA will put the banking system in limbo, although this is unlikely. Ultimately, the ECB can’t support the banks forever, especially if they are not solvent. What the ECB says here will drive risk sentiment.
  • Will the Greek’s set up a new currency if the government runs out of money?
  • Ultimately, this vote doesn’t mean Greece will leave the EMU, but it significantly increases the prospect. The question then is whether this will lead to a protracted sell-off on contagion fears.

Traders and investors alike have so many questions and answers are going to be hard to come by. This lack of clarity is likely to keep risk rallies limited, especially with various major markets showing signs of steep downtrends.

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