Markets Remain Off-Kilter As Deadlines Loom

The markets remain off-kilter. The dollar has recouped a little of the ground lost yesterday. Reports in a Greek paper that Tsipras may be reconsidering Juncker's proposal could prevent a deeper pullback in the euro, which found a bid near $1.1135 after approaching $1.1280 in yesterday's spectacular reversal. Over the next two days, there are an estimated 3.3 bln euro options struck at $1.12 that are set to expire.

Asian equities traded higher, with the MSCI Asia-Pacific rising almost 1%. The Nikkei gapped lower yesterday, and although it gained almost 0.7%, it did not even enter the gap. A break now of yesterday's lows (~20093) would strengthen the technical case of a more significant (island) top and warn of the risk of a deeper retracement of the Nikkei's 26% rise this year through last week. The other significant large market rallies in Germany and China have already been nearly halved.

The PBOC rate and reserve cuts over the weekend failed to stem the sell-off yesterday, but additional liquidity injections, reports that China may cut the stamp on equities, and talk that new IPOs may be shelved, may have helped today. The Shanghai Composite initially fell through yesterday's lows but recovered strongly to finish on the session highs, just below yesterday's highs for a 5.5% rise.

The focus remains on Europe. The stock markets are recovering after extended losses yesterday. The Dow Jones STOXX 600 is off by about 0.4% near midday in London. The Italian and Spanish bourses have moved into positive territory. Bond markets are mostly steady to firmer.

Greece's IMF payment is due today. It is widely expected to miss it. As we have noted, this in itself does not constitute a default by the rating agencies. It will not be regarded as a credit event. Although the IMF's Lagarde has used the word default, an IMF spokesperson has clarified that in an official document "arrears" will be used to characterize the situation. However, the failure to pay the IMF gives the ESM greater discretion to request expedited payments itself. The next private sector obligation is a JPY20 bln Samurai that is due in mid-July. Note that this is roughly the monetary cost of the referendum (140 mln euros).

The poorly constructed referendum itself is turning into a referendum on EMU. That said, it is not clear what happens if Greece votes 'No' on Sunday and precisely how that leads to an exit from the euro area. The Greek Finance Minister apparently has threatened to seek an injunction from the European Court of Justice to prevent this. However, many suspect that if the ECB withdraws approval for ELA, the ensuing banking crisis, without means of recapitalization, could be a powerful push.

A report suggests that the Syriza government may appeal to the ECJ to try to force the ECB's hand, but its most recent decision on OMT suggests the ECB would be given wide latitude. A ruling that the ECB can buy sovereign bonds under OMT is not the same thing as forcing it to grant ELA.

The referendum itself is confusing. As former Greek Finance Minister Venizelos has noted, the government is asking the Greek people to vote against measures for which the Syriza government itself has 90% support. Moreover, the second financial assistance expires today.

When the S&P cut Greece's debt rating yesterday to CCC-, it said that the odds of Greece leaving the EMU were 50%. We suspect it is a bit lower than this. Instead we see the Syriza government as so frustrated by the inability to change Europe and the terms of the debate, or even to peel off some of the peripheral countries that it hoped would have been more sympathetic, that it is willing to self-immolate. On top of the financial crisis, and the humanitarian crisis that Syriza so passionately identified, it will bequeath a political crisis. A 'No' vote could see the president of Greece resign and a 'Yes' vote would topple the Syriza government. Yesterday, Tsipras hinted that he would resign on a 'Yes' vote.

The economic data seems of less consequence today. Still, Japan’s Prime Minister Abe cannot be happy with today’s reports. While total labor cash earnings rose 0.6% in May, this was mostly bonuses. Regular pay increased by only 0.3%, and real cash earnings fell 0.1% (consensus was for a 0.2% increase) and have not been positive since April 2013. Separately, auto production fell (-16.6% year-over-year after a 7.4% decline in April) and construction orders fell (7.4% after 12.1% fall in April year-over-year).

In the eurozone, the May unemployment was unchanged at 11.1%, and the preliminary June CPI was in line with expectations, easing to 0.2% from 0.3%. The core rate slipped to 0.8% from 0.9%. Germany reported a 0.5% rise in May retail sales, which was better than the flat consensus expectations. Unemployment was unchanged at 6.4% in June. Separately, the UK revised its year-over-year GDP for Q1 to 2.9% from 2.5%, even though the quarter-over-quarter pace of 0.4% was unchanged. Separately, the Q1 current account deficit was larger than expected at GBP26.5 bln.

In North America, Canada reports April GDP. A small increase is expected at a 0.2% contraction in March. The US economic data includes CaseShiller house prices, which tends not to be a market mover. The Chicago PMI slumped to 46.2 in May but is expected to rebound back above the 50 boom/bust level. Separately, we note that the Export-Import Bank charter will lapse. It can service existing contracts, but cannot make new loans. We anticipate that it will be revived in some form in the coming weeks. Lastly, we note that Puerto Rico, unable to service its debt, is requesting a moratorium.