Greek Deadlock Causes Stress In European Markets

There has been little surprise in failure to seal an agreement between Greece and its creditors over the weekend. Euro gapped lower at week’s opening against the US dollar. As Asian traders look to diminish their euro exposure, European traders temper the euro sell-off with no strong conviction to pull the levels above the 200 hour moving average (1.1265). The key short-term resistance stands at 1.1315/85 (Fibonacci 76.4% on recovery from May 18-27 sell-off / June 10th pick).

The feeling of rising stress drives the European markets.

The spread between Eurozone’s core and periphery yields widens to highest since August 2014. The negative correlation between Spanish/German yield spread and EUR/USD reaches 40-50%; broader yield spread will likely encourage a weaker euro against the US dollar as Greece sinks deeper under EU’s teary eyes.

The Euro Stoxx futures fell as much as 1%, while DAX futures hit 11000 in early trading. Investors’ appetite for the euro denominated assets is expected to remain limited.

The selling pressures spill over to the UK equities and should encourage the FTSE future back to 6715/6700 June lows. The 200-day moving average (6660) should see some corrective bids. The Rolls Royce outperforms the competition as Paris Air Show begins on US military deal and Mitsubishi’s will to participate in A330neo engine development. Rolls Royce alone is powerless to attract inflows in the FTSE index however, sell-off in easyJet (LONDON:EZJ) and IAG (LONDON:ICAG) weigh up to 1 point in London at week’s open.

The UK releases inflation and unemployment data as well as the BoE minutes this week. As the leading G10 central banks step back to a monetary policy easing phase, the hawkish BoE expectations and stronger pound should fuel disquietudes regarding a too-early step toward normalisation in the UK. The BoE minutes will certainly reveal members shifting back to the hawkish camp.

As a cherry on top, the Saudi Arabia’s decision to open its stock market to foreign investor is a shiny new destination for investors looking to fly out the European markets this week.

Will Grexit be a relief?

June 18th is the next critical date and could be the last one before a Greek default. The ECB stands ready for deterioration in Greece’s banking system. The end of the Greek drama, with or without a happy ending, will certainly be a relief across the Eurozone.

Ceteris paribus, the risk of immediate contagion remains limited. A Grexit from the euro union is fundamentally positive for the value of the single currency. From a portfolio standpoint, the present value of future inflows could only be higher as the worse performing asset – Greece - quits the monetary union. The knee-jerk reaction to a Grexit is expected to be negative, an acceleration on stops being the major short-term risk in euro long positions. Once the stops are cleared, a possible post-Grexit bounce may interfere with Draghi’s envy for a weaker euro.