During one of the most watched weekend of the year, markets spent their weekly break bracing for hints on the result of Greece’s referendum, with investors scrambling to test their trading strategy to new scenarios. Early this morning the referendum’s results were confirmed, with Greece voting against a financial aid based on austerity measures and welfare structural reforms. Despite the exit polls on Sunday which pictured a country divided down in the middle in a very close race, at the end, 61% of Greek people chose with Prime Minister Alexis Tsipras’ side against accepting the bailout deal offered to Greece by its international creditors.
Now that Greece has confirmed its stance and the Greek government has received an unwavering mandate not to compromise social welfare and budget spending in exchange for desperately needed cash, the international community is preparing for a common response, while Europe readies itself to contain immediate spillover effectsarising from the referendum’s result. Although Greece has a rather small economy and it only accounts for a fraction of the world’s economic activities, the uncertainty created by Greece voting NO on Sunday may have far reaching ends. In Europe, peripheral states will almost surely see their costs of borrowing risewithin the short term, as bond markets adjust to the Greek news, while a surge in the US dollar may contribute to deteriorate economic indicators and force the Federal Reserves to further postpone its anticipated first interest rate hike. While I do not believe that Greece is large enough to materially affect macroeconomic fundamentals, I thinkit will add onto investors’ concerns about a Chinese economic slowdown and stock bubble, while continuing to be a drag for the timid growth witnessed in Europe over the last months.
The immediate reaction from investors has been, as expected, a sale of European equities, a shift into the so called “safe-haven currencies”, such as the USD and the CHF, anda return to cash by closing loss making positions. The Euro Stoxx 600 Index was trading lower 1.30% in early trading this morning, with the German Dax losing 1.35% and the FTSE 100 down 1%. Although equities are trading in negative territory, it appears that, at least this morning, investors are adjusting their investment strategies in an organized fashion without causing a panic selloff, and markets seem to be handling the referendum news relatively well.
The Euro dropped as much as 1.27% following the announcement that Greece has formally rejected the latest finance aid proposal, but it has since then recovered the majority of the losses, trading at 1.1076 against the US dollar at 10.30am.
US equity futures are also pointing to a weaker opening, with US markets poised to follow Europe into an “adjustment session” likely to be dominated by theuncertainty surrounding the response that policy makers and officials of IMF will convey to Greece in the wake Sunday’s referendum.
Withwidespread uncertainty related to the faith awaiting Greece, markets will probably be driven by volatility. However, considering that investors have had the time to prepare for a potential Greek default and that financial markets across the world had undertaken unprecedented steps to create contingency measures against cross-borderspillovers, limited pull backs may indeed open interesting buying opportunities into some asset classes that are now trading at attractive levels.
This article was issued by Paolo Zonno, Trader / Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.