Greece: Same Story, Different Day

The negotiations between Greece and the EU are frozen until July 5th referendum, until Greeks voice their opinion on whether or not Greece should accept the 3rd bailout package. The latest polls show that the yes-no ratio remains very much balanced. At this stage, there is little visibility on the outcome of the referendum and Greece’s future in the Eurozone.

The over-stretched negotiations and the failure to seal a deal certainly hit the popularity of Syriza. The capital controls and the temporary rupture in banking activity, constraining Greeks to withdraw a maximum amount of 60 euros per day, has certainly been the last nail in the coffin. PM Tsipras and FM Varoufakis are now giving Greeks the heavy responsibility to decide whether the country should accept the EU aid.
The timing of the referendum may have a significant impact on the outcome. A part of no-camp citizens may have changed their mind after being choked by the tightening belt on their personal finances. the market gives 75-80% chance for a yes vote.

The outcome of the referendum is however anybody’s guess. Ladbrokes have stated today that 65% of the bets taken have been towards the ‘Yes’ side.

In the dearth of empirical evidence, we only have several hypotheses in hand.

Trading the euro on Greek story is a risky undertaking. The volatilities are two sided.

This being said, volatility means opportunity.

Trading EUR/USD would be taking the hit forthrightly; therefore approaching the problem sideways could help curbing the excess volatility. EUR/JPY and EUR/GBP, with realized weekly volatility at about reasonable 7.5/8.0%, could be interesting alternative to highly popular EUR/USD.

A no vote will not automatically drive Greece out of the Eurozone yet significantly increase the probability of a Grexit and could lead to another gap down in Asian open and push EUR/JPY down to daily cloud cover (131.53/133.84), renewed downside pressures on 0.70p in EUR/GBP could be heavy enough to break the thick support. Potential rush to German bund market could widen the core-periphery spread and the European equity markets could take another dive. The DAX futures are then expected to gap below 10800 key support. The Japanese stocks could offer the good escape from the euro exposure.

A relief rally following a yes vote is what could push EUR/JPY above the 200D MA (137.23) and bring 140/141 back in target. Versus the pound, the 0.70p support could only strengthen following a reaction bounce and initiate a bullish trend toward 0.7200/50, May-June downtrend top.

Markets between rock and hard place on Grexit Worries

With the US on a half day ahead of the Independence Day we can expect light trading volumes. An elevated Volatility Index and the uncertain outcome of the Greek referendum on Sunday may lead significant ‘risk-off’ over the coming days. The polls offer little information with a very tight split between the No/Yes.

If the mere announcement of a referendum sent the markets into turmoil last week then a ‘No’ Vote will likely present even more volatility as it is extremely unclear what might happen from here.

A Yes vote is ultimately what the markets seek and even though the creditor proposal is likely off the table at this point it may help re-open negotiations and this, from a markets perspective, is ultimately a more palatable outcome.

Already this morning, we’ve had Varoufakis interviewed on Irish radio by the excellent Audrey Carville. His belief seems to be that the Greek government has not failed, that its Europe in not listening to reason that has ultimately failed. He has also denied that Greek banks are insolvent and that they will re-open on Tuesday. At this point, bank liquidity over solvency is more pressing and with rumours circling that a mere €500m in cash is left in the coffers of the various banks, one has to question his point of view.

The ECB has sent Constancio to soothe financial markets, reminding of backstops and ultimately attempting to reiterate the Draghi ‘whatever it takes’ rhetoric. Consequently the euro remains higher against the dollar and 10-Year bund yields are steady around 0.82%. We will find out how sustainable and useful these soothing words will be come Sunday open.

Closer to homes, the UK services sector continues to be a mainstay of the economy. The pound is slightly higher against the dollar as output in May came in at 58.5 against an expectation of 57.4.

The financial sector is feeling most of the pain in early trade with UK banks shedding an average of 1%.

There are few bright spots :

BP (LONDON:BP) (+0.97%) A better settlement than was expected for BP in the wake of the Deepwater Horizon disaster has brought investors back into the fold. In the face of declining oil prices, there are mutterings of potential M&A activity in the oil sector and some have mentioned Exxon as a potential suitor for BP. I would maintain that the outlook for BP is as a sole company. A share capital of £80bn and a large premium, the company has actually outperformed some of its peers this year. There will be mergers in the sector but I would look elsewhere’

Tui AG NA (LONDON:TUIT) (+1.44%) In a bid to focus on the main TUI brand, the company has sold a stake in a Grecotel. It’s apparently not related to the current Greek events. Russian oligarch Alexei Mordashovis said to be adding to his already substantial holdings.

BAE Systems (LONDON:BAES) (+1.21) A broker upgrade from UBS on the back of its attractive dividend and valuation has elevated BAE today. The stock has been in decline since mid-March, falling by as much as 17% since then. With an implied upside of circa 20% from here based on broker ratings and price targets, the company’s independence from the economic cycle may well see near term boost in price.