Today is the day: June 30th, the deadline for the IMF payment. Greece is expected to default on 1.6 billion euro worth of repayment due to the IMF. The ECB keeps the ELA unchanged; the Greek banks remain closed with 60 euro withdrawal allowed per citizen per day. Scepticism regarding the June 5th referendum, potential Grexit and the unknown implications of a Grexit scenario keep the tensions very much tight on the financial markets. The flight to security is the theme. Where to find ‘security’ is the question.
Swiss franc, gold and yen share the safe haven inflows
The panic in financial markets tends to push investor to park their cash in safe harbours until the Greek storm abates. Investors need visibility and the lack of conspicuousness drives traders toward ‘safer’ assets.
Yen does not only offer a classical safe haven destination but also a favourable geographical diversification for investors reducing their portfolio exposure to Greece. Eurozone stands for less than 5% of Japan’s trade relationships, a potential Grexit and stagnation in Eurozone’s economic recovery should therefore have a limited impact in Japan, at least in real terms. As the safe haven inflows continue feeding the yen market, USD/JPY consolidates below the Ichimoku’s conversion line (123.24). Stronger appetite in yen points at an extension to the daily cloud cover (120.82/121.01). Option bets are supportive of the downside below 122.50/123.00 for today’s expiry. Intermediate support could be found at 121.87 (50D MA) before 120.85 (100D MA). On the upside, offers trail below 124.40/45.
Gold interestingly manages to catch limited volumes of the safe haven traffic, the upside potential remains limited following the failure to clear resistance at $1200. Over the past two weeks. Despite the significant rise in physical gold demand, especially in Greece over the past weeks, the appetite in gold could not be restored in portfolio allocations. The breakdown in negative gold/equity correlation back in 2011 is a good reason to keep investors away from gold. Despite the welfare that gold coins may offer to their holders, physical gold market stands for a tiny part of the overall gold market. To give an idea, daily volumes in iShare Physical Gold ETC stand in average at about 1% of iShares Gold Trust.
The safe haven franc has become an enduring headache for the Swiss National Bank. Located in between France, Italy, Germany and Austria, Switzerland has nothing to offer as a ‘safe-haven’ within the context of a Grexit. The Eurozone countries stand for two thirds of Swiss trades, placing Switzerland in a highly EZ-sensitive position. Regardless of its geographical and practical inconveniences and its deteriorating macro picture, Switzerland is still considered a safe harbour in the middle of the EU storm. However, the SNB’s efforts to curb the franc strength and a possibility of deeper negative rates should at some point cool-off the appetite in franc. The euroswiss futures test 101 mark, as traders price in the possibility of an emergency cut of 25 basis point, should a potential Greek default revive panic in the financial markets, driving massive cash toward the Swiss franc.
UK growth picture fails to underpin the FTSE 100
The fact that the UK grew 0.4% in the first quarter and 2.4% year on year is great news. Unfortunately the positive news has failed to underpin the FTSE100 which is presently down some 1.15% with only two stocks in the green. The pound pushed a little higher against the dollar to 1.5744 and may well continue the trajectory were it not for the appetite for safe havens this week.
There is broad risk-off in the equity space today as the Greek crisis rumbles on. The contagion effect seems limited in terms of capital markets. This is not the case in risky assets with some key levels breached over the past number of days. The UK market appears for now to be somewhat protected given its weighting to miners and defensive stocks and the fact that its constituents are not euro-denominated.
EasyJet Plc (LONDON:EZJ) (0.19) a sell off yesterday across the airline sector is seeing some tentative bargain hunting this morning. Lower oil prices have also helped to support the stock Fears of unrest in Africa and Middle East and ramifications of the Greek referendum may continue to weigh on the share price in the near term.
Carpetright (LONDON:CPRC) (+2%) Full year results were strong, despite the decline in gross margin which is a reflection of heavy promotion to boost sales. Current trading shows UK LFL +4.9% and ROE LFL +7.4% in the first 8 weeks. The recovery plan being implemented seems to be working. The shares have gained circa 50% year to date.
Ocado (LONDON:OCDO) (-3.86%) A solid Q2 trading performance and news that the online delivery service is in talks with international retailers has seen shares in Ocado push up some 30% since the lows of late March. Technical resistance at the 450p mark and some profit taking today is putting intraday pressure on the share price. The update is encouraging with success in growing its customer base despite a challenging backdrop.
Nevertheless, despite the Greek rumblings and the fact that people can only really speculate on an outcome, the UK growth picture will likely embolden some of the BOE hawks despite warnings from their chief economist, Andy Haldane. It’s certainly possible that despite higher wage growth here, any sterling strength could hamper any benefits from higher incomes.
UK consumer confidence is at a 15 year high but given current market conditions and the constant stream of Armageddon-like rhetoric from both the Greek and troika camp, this may be temporary. That being said, the UK is, in my opinion, better placed economically to tighten policy than the FOMC.
The rush to rate normalisation is one thing, but the timing of it, even if slow and gradual, could well upset the current growth trajectory and marginally disturb an already volatile market. This is something Janet Yellen could possibly learn to her demise should the Fed decide to embark on a tightening spree in the autumn.
RBA governor Stevens is also weighing in with his dovish calls this morning saying that loose monetary policy will likely be here a while longer.
Chicago PMI and CB consumer confidence are on the UK macro docket today. The former is expected to fall into contraction from 50 to 46.2 which does not bode well for the hawkish FOMC members. Consumer confidence is also slated to see a downturn from 97.1 to 95.4. This number could well be lower given the current gyrations in equity markets.
We expect the Dow to open 50 points higher but choppy conditions could change that view over the coming hours.