Asian markets recover mildly after the global rout yesterday. Nikkei managed to sty above 20000 handle and is up 0.4% at the time of writing, trading around 20200. Overnight, S&P 500 suffered the worst one day drop this year and lost -43.85 pts, or -2.08% to close at 2057.64. DJIA lost -350.33 pts, or -1.95% to close at 17596.35. US treasury yields also plummeted on flight to safe haven with 30 year yield closed at 3.099, comparing to Friday's 3.250. 10 year yield closed at 2.331 versus Friday's close of 2.476. Gold attempted to rebound on risk aversion but quickly lost steam. Meanwhile, Crude oil dipped back to lower side of recent range. In the currency markets, the Japanese yen remains the strongest major currency this week on risk aversion. Euro staged a strong rebound after initial selloff and is mixed against other currencies. Canadian dollar is indeed the weakest one so far.
The strong rebound in Euro caught most traders by surprise. EUR/USD dived to as low as 1.0954 but is now back at around 1.1180. Some analysts attributed the rebound to short squeezes. Meanwhile, some others noted that there has been a negative correlation between Euro and European stocks for a while. Investors exited their equities position and bought back euro in return. Another development to note is the lack of sustainability in dollar's strength. We'd believe that the state of global financial markets is an important factor for Fed to decide whether to hike interest rate in September or not. Thus, a Euro negative news from Greece doesn't necessarily mean it's dollar positive.
Greece is expected to make a EUR 1.54b payment to IMF today. But IMF has already said that failure in payment would immediately be in arrears rather than considered a default. IMF chief Christine Lagarde said she'll notify the fund's executive board promptly in case of any non-payment. ECB executive board member Benoit Coeure said that "the exit of Greece from the euro area, which was a theoretical point, can unfortunately no longer be ruled out." And, "this is the result of the choice of the Greek government to put an end to the discussion with its creditors and to call a referendum, prompting the Eurogroup not to extend the second aid program."
S&P downgraded Greece's credit rating to CCC- from CCC. The rating agency noted that "Greece's decision to hold a referendum on official creditors' loan proposals as a further indication that the Tsipras government will prioritize domestic politics over financial and economic stability, commercial debt payments, and eurozone membership." S&P expected that Greece will likely miss the EUR 1.54b payment today. Even though that is not considered a default, "a commercial default is inevitable within the next six months."