Developments in Greece over the weekend have really shaken the markets on Monday, prompting a flight to safety among investors as they seek to shelter themselves from the fallout of the increasing risk of a “Grexit”.
Greek Prime Minister Alexis Tsipras’ decision over the weekend to call a referendum on the cash-for-reforms deal offered by the country’s creditors has caused a storm in the markets this morning. On the bright side, we should at least have an answer on what will come from all these negotiations in a week, which will remove all of the uncertainty that has been hanging over the markets.
The problem is the timing of the referendum, with the announcement coming only a few days before a large unfunded repayment is due to the International Monetary Fund. If this referendum goes ahead, Greece will default on this payment which could have easily been avoided. The country is already suffering today as a result of the timing of this as the European Central Bank was effectively forced to freeze the cap on emergency liquidity assistance to Greek banks despite there being large cash withdrawals over the weekend. Capital controls were imposed over the weekend and the banks will now not open this week.
Polls will undoubtedly be conducted this week to offer insight into how Greeks plan to vote, but as we’ve seen in the past, they are no always accurate. The consensus until now has been that the majority want to remain in the euro but problems may arise depending on how the government campaigns and whether Greek people are made aware that this is effectively a referendum on eurozone membership. If the government continues with the same rhetoric it has used in public throughout the negotiations, aggressively attacking creditor proposals, people may be swayed to vote against it.
What’s clear is that we face a week of uncertainty and this is spreading throughout the markets. What’s worse is the referendum is again scheduled to take place over the weekend which means we could see similar moves in the markets at the open next week.
Developments in Greece have almost completely overshadowed the move by the People’s Bank of China to support the equity markets which have now entered technical bear market territory, having fallen more than 20% in the little over two weeks. There have been efforts as of late to cool the equity market in China after an astonishing 12 months in which the Shanghai Composite rallied more than 150%, which raised concerns that a painful correction will follow.
The efforts have worked, unfortunately too well, which has forced the PBOC to step in and try and halt the freefall. Cuts to interest rates and the reserve requirement ratio to select lenders appeared to have had the desired effect early in the session but it wasn’t long before selling kicked in again and the index broke below 4,000 for the first time since 10 April. It will be interesting to see in the coming days whether the PBOCs efforts will help to stabilize the Chinese index which has been extremely volatile in recent months.
If all of this wasn’t enough for the markets, it’s also jobs week in the U.S., which typically brings plenty of volatility in itself. The report will be released on Thursday this week with U.S. markets being closed on Friday for Independence Day. Despite what’s going on in Greece, this report is still extremely important, especially with the September meeting not too far away, at which the Federal Reserve is widely expected to hike interest rates.